The Importance Of Underwriting In Syndication

Underwriting is such an important part of syndication. We want to be sure we're giving the right returns to our investors because they have entrusted us with their dollars, their $100,000, $200,000, $500,000. Thoughts are probably dancing through the back of their mind:

“Will I get my money back?” 

And another being: 

“Will I get my returns?” 

When investing such large sums of money it is understandable that one would have those thoughts, which is why, as a syndicator, you must invest wisely. 

Find the Right Market.

An excellent tip is to find an area with booming employment rates because if there are jobs there, then the property will increase in value and the neighborhood will get a little bit better. It’s good to buy a C class property in a B or B minus neighborhood, (please don’t buy anything and everything because you’ve got to underwrite it).

You need to have the right mindset, there's an emerging market where you can look for brokers, letter campaigns or whatever you choose to do to find leads on market deals. You then want to underwrite them well because if the numbers don’t work on the paper, they won’t work at all. You’ve got to marry the numbers, not the buildings. Never marry that nice-looking building and don’t fix up the underwriting. Let the numbers speak.

Underwriting.

A lot of people will say: 

“I don’t want to spend too much time in underwriting.” 

I don’t like that because you cannot underwrite a deal and put an LOI together in five minutes. What if your property got accepted and your numbers were wrong? You are going to want to do a quick turnaround but try not to, go for a very extensive underwriting period. Go look at the P&L (profit and loss) for twelve months, sometimes you get eleven months, sometimes thirteen, you’ve got to make sure that you are not looking at the wrong numbers. Another thing to take note of for your underwriting is the rent roll. 

Three things are very important in underwriting. The number one thing is your taxes. The seller might have purchased that property five years back or even ten years back. Their tax amount is going to be different than ours because we are going to pay a higher amount than what they paid. The mill also rates change. 

Rent Roll.

The current rent roll is very important. Oftentimes, they don't give the later on P&Ls because they look may look bad. Another useful trick I will share is Apartments.com. Go there and try to look for the property, those are the most current trends you can find, it’s called a "current rent sheet". It’s the rent sheet with all the assumptions. It details administrative costs, expected allowances, deposits, and lab systems. It tells you everything there in that frame. 

You have to take the real rent role as of now, plug it into the comprehensive underwriting tool. Get a one page of sheet, so you could control the rent increases each year. You can control the concessions, the delinquencies, the lab systems, the cap rates, everything is changeable. It puts quick reports.

Insurance

You should have an insurance broker in multifamily especially. You need to build a relationship with that person. You need to be able to ask them:

“If I give you a pocket listing on an address, can you tell me if it’s thirteen buildings or twelve buildings, can you give me a ballpark number of the insurance amount?” 

I see this constantly in underwriting, in all the P&Ls there are sometimes very low numbers for insurance because the sellers might have a master policy of insurance, as I do now for money communities. You can save almost 25%. You need to see how much real insurance is.

Management Fees

Often, the P&Ls don’t show management fees. They say:

“We are doing it ourselves, we are managing ourselves.” 

Or they tell the management company to reduce the charge. You need to be a bit of a detective to be truthful in looking at the P&Ls and the rent rolls. You cannot take the total given to you as truth. You’ve got to question is:

“Why is this tax low? Why is this insurance low? The management fee should be $50,000? They put $23,000 in there.” 

Payroll

In the payroll, you have to look at where you’re buying the property and what the going rate is to pay the community managers, the benefits packages, the insurance, etc... to find out how much the money per unit is. We need to take $1,000 per unit or $1,400 per unit for the payroll because it’s going to come from us, from the property. With marketing costs, you have to look at what the salary is telling you. 

“Where is this property? Is it right on the thoroughfare? Are you going to be designing new brochures to get people and have the traffic coming in? Are you going to be advertising on Apertments.com or Craigslist and local websites?"

The more undiscoverable the property is, the more marketing costs you will need to pay.

Administrative Costs

Look at what the numbers are showing. You also need to look at what it will take for you to do it. A lot of investors when starting out, promote to get a property management company. They need to have confidence in their property management company and find out what their charges are. How much do they charge per unit or do they charge a percentage of the total rents collected? That’s how the majority of them get paid. The lower the number of units, the higher the percentage. It could be 6%, 7%, 8%, 9%, 10% for twelve units. WIth bigger units, for example, 100 units it gets to be about 4%. The underwriting is such a great blueprint for us to get a look under the hood, we should never buy a car unless we’re going to look under the hood, under the wheels and, at the transmission. The same thing is true in buying multifamily. 

Once, we buy multifamily, we cannot get rid of it right away. We have a commitment of at least five to ten years, maybe even longer. If the market takes a downturn, you’ve got to be able to sustain that property for a longer period of time. Underwriting is so important. That is the real crest. You need to spin the plates so to speak, one is the teams you formed, another is the investors and that’s a big plate to spin, the other one, which is a huge plate, of course, is the underwriting. The deal-finding and working with the brokers and getting the deals, that’s a bigger plate. The loan qualification is a smaller plate. Property management, which I say is the fifth plate is also a small plate. Deal-finding and underwriting are very important.

Check out the full podcast episode here: https://lifebridgecapital.com/2019/04/ws190-the-importance-of-underwriting-in-syndication-with-vinney-chopra/