How I pressure-test multifamily deals before going into full underwriting

Question

I’ve been underwriting a lot of multifamily deals lately, and one thing I’ve been working on is improving my initial pass — the quick screen I do before committing time to a full 10-year model.

To make that easier, I’ve been building out a cleaner deal dashboard. The screenshot below is from one of my test underwrites. It isn’t based on a real listing. I was simply running assumptions through the template to see how everything flows and to make sure the logic holds up.

Before I take a deal deeper, I usually look at:

• Whether the rent lift is realistic for the submarket
• Expense ratios and per-unit benchmarks
• Early-year DSCR and operating margins
• Yield-on-cost at stabilization vs market cap rates
• Whether the renovation scope actually supports the proforma

If a deal looks good after that quick screen, then I’ll run it through a deeper underwriting.

I’m always curious how other investors here approach this.

What do you look at during your early-stage underwriting?

Brian Briscoe · Answer

I've seen people advertise 10-minute underwriting and quick checks... Surprisingly, those are rather simplistic. Like I said, if it's a property I want, I'm underwriting it. If not, I won't. That's why your buy-box criteria is so important.

Gabe Goudreau · Answer

Same here, that's the first step before even launching into the whole underwriting process for me. I always think of the old adage, even if it's a little cliche - location, location, location.

Greg Kasmer · Answer

@Gabe Goudreau - I agree with your metrics you're looking at as an initial pass. I've found the rental/income increase is the biggest determining variable for opportunities. If you have significant rental revenue increase potential (20+%), then the next biggest area to understand for me is the capital/renovation budget to get those ideal rents.

Gabe Goudreau · Answer

Thank you, Greg! I just look at it like a math question at the end of the day to ask myself: "is the juice worth the squeeze"?!

Brian Briscoe · Answer

I look at the location first. If I like the location and it's in my buy-box, I underwrite the deal. I'll find the price it works at for me and make an offer.

My only quick-pass criteria is whether it's something I would want to own.

I used to think of it as a math problem (BA and MS in Mathematics here), but it's really more of looking at a property and an area and asking yourself if you believe it'll be better 5 years from now. Of course, the math still needs to math right.

Romina Gonzalez · Answer

Totally agree with Greg! Rent lift potential is the starting point, but the renovation budget assumptions usually take the most time to nail down.

How I pressure-test multifamily deals before going into full underwriting

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