What’s your underwriting criteria?

Question

I’m interested to know what everyone’s underwriting criteria is…

Cash on cash

IRR

DSCR

Expense ratio

1% Rule

2% Rule

50% Rule

Etc.

Basically how do you want to write a potential multi family investment property?

I’m aware there is no one-size-fits-all approach, I’m just curious to what you other BP’ers are doing…

When you post a reply, it would be helpful to know what market you invest in, and what your average deal size is, number of units, etc.

Josh Oaten · Answer

@Ryan Meggison

We underwrite using Google Maps, as the first thing we look at is the area a property is located. Some of the basics include:

• Major developments
• Big Box stores, major shopping
• Hospitals
• Education Facilities
• Comps
• Crime (Mainly shootings)
• MHHI

Check out @Omar Khan BP Blog on using Google Maps to underwrite

https://www.biggerpockets.com/member-blogs/10776/79833-underwriting-the-google-way-building-maps-not-numbers

David de Luna · Answer

Investing in NorCal where I live, El Paso, Indy, KC, OKC.

Target is 4 - 12 units. No exclusively all 1 bed - those tenants tend to be more transient, shorter term. I'll consider a mix of 1 bed + 2-3 bed, but not a 4plex or 8+ units of all 1 beds.

10%+ CoC

17% IRR

PM 10%

OpEx 5%

CapEx 5% (up to 8% if older C class unless updated throughout)

Vacancy 5%

Prop Tax - In areas where this is a commonly known % of sales price, find it and use it, for other areas where it's all over the map, consult REA (in Indy where it's all over the map, it's also provided pretty reliably in the MLS listing anyway). Check online. For example, there's a website for the Albuquerque area where you put in your zip code and value and it will give you prop tax.

Insurance - Consult REA or local (must be LOCAL) insurance agent for going rates.

I also list on my spreadsheet whatever expenses the MLS listing (or other sources of Intell) tells me seller pays (if provided) - utilities, garbage, etc. If not provided, I leave it out and see how the numbers shake out. If I don't make my numbers then it only means even if there were utilities to add, the numbers would even worse anyway.

Lots of properties on the MLS (or other sources of Intell) list only "annual gross income" which I divide by 12 and use as monthly rent. Often it won't even tell you unit mix (without which you can't do market research) but as a first pass you only really need the gross income (minimally). Note: If you determine there are in fact vacancies, I would fill-in the vacancy with rent identical to the others so I can see what the numbers look like fully occupied. If the numbers look good, then you'll still need to find out why it's vacant and what the rental market is like before relying on fully occupied numbers. Never assume you'll be easily able to fill the vacancy. You may discover a very good reason why it's vacant and may remain so.

With the above additional intell I can see if I will bother to look further. If at least 10% CoC and 17% IRR, then the property warrants going deeper. I'll start hunting down rent roll, unit mix so I can research rents, and actual expenses.

Ryan Meggison · Answer

@Josh Oaten can you expand on your google mapping tool?

Ryan Meggison · Answer

@David de Luna  thanks for your input!  How are you using this info to come up with an offer?  Are you using market cap rates?

Josh Oaten · Answer

@Ryan Meggison

First must fit:

100-200 units

B/C class value add

1975 + vintage

10-15 % below market rents

$10-$20 million

And be in a strong area as of our google mapping tool

We offer investors:

CoC - 8-10%

IRR - Mid Teens

over a 5-7 yr hold period with a min 1.25 DSCR

Tj Hines · Answer

CoCR 8-12 %

IRR 12% avg over the life of the investment

DSCR 1.35+

Expense Ratio 50-60% depending on the size of deal and manager operating it.

Chase Louderback · Answer

Hi @Ryan Meggison

Looking in VA, GA and SC mostly. General criteria is:

8%+ avg CoC

15%+ IRR

Around 55% Expense ratio for class and area of asset.  This can vary a decent amount from sub 50% to around 60%.

The main way I look at underwriting these properties in a new market is to do a few properties that all have similar age, location, asset class and have the projections verified by local property managers.  From there I am able to build my own rough rule of thumbs so that I don't have to constantly pester PMs and if the deal looks close THEN I can reach out to the PM and really hone in on the projected expenses and income.

Hope that helps

What’s your underwriting criteria?

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