Underwriting multifamily deals

[Barri Griffiths]

Hey guys,

I was hoping to get some help when underwriting deals.

I've had some properties that have come across my desk, that have below market rents, and either with some better management, or light renovation there's some possibility of upward mobility in rents.

The problem is they're being sold at 6-6.5 cap. Which means after debt service there wouldn't be much cash flow, and COC is about 4%.

However with the Freddie Mac small balance program we could get up to 3 years of interest only payments.

What I'm trying to asses is what is is an acceptable yield to walk through the door at, and be happy with should things never change, and we aren't able to raise rents at all. 

Taking into account this worse case scenario, but at the same time understanding that there is a good probability of increasing the NOI through rent bumps, how do I decide what's acceptable and what's not?

I think when I break it down what I'm trying ti ask is, if I get IO for 3 years, can I then use that interest only to calculate what I can pay for the property along with what a pro forma NOI would look like with the rent increases?

Thanks

Barri

[Mackal Smith]

That sounds risky to me. I'm a pretty conservative investor so my risk tolerance is not high, but in my opinion you should go in assuming the worst including a traditional loan. If the property cash flows enough considering that then it is a deal worth doing. If you have to rely on IO and an idea that rents can be raised, it seems to me that the math isn't working until you tweak it artificially. If it were me I would keep looking but again I'm a really conservative investor. My fairly simple rule is a minimum of $100/door cash flow per mo. I always beat that, but that is my bottom number anything below that (even $99.99/door) goes on the scrap heap. Good luck, and keep us updated...