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Underwriting ground up development projects involves a different strategy compared to buying existing properties. Here’s the basic overview of how you can underwrite a development deal in 5 steps.

1. Proforma Income

You MUST know your market. When underwriting a ground up development project, you are making educated assumptions about what will charge for rent and auxiliary income 2 years in the future.

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2. Expenses

Verify with a property management company what your operating expenses could be. Add a buffer %. Budget more for marketing during the lease up. Have your operating expenses grow as the occupancy increases.

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3. Debt & Equity

Model the equity and any municipal incentive being spent on the project first. Once the equity is completely spent the construction loan will be used.

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4. Refinance

It's common for developers to refinance out of the construction loan and into permanent financing. Use a cap rate higher than what you think it will be. Budget for loan fees. Verify you have a comfortable DSCR in your refinance month and beyond.

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5. Exit

Are you planning to sell after construction completion? Long term hold? Assign a cap rate to determine the valuation at sale year. Budget for broker fees and transaction costs.

• NMHC Quarterly Survey of Apartment Conditions

• Pricey Markets on the West Coast Stalling Pandemic Recovery

• Lease-Up Demand is Solid, But it Doesn’t Feel Like It

• New Single-Family Rentals Reach All-Time High

• Zumper National Rent Report

• Big Apartment Demand in Texas Outdone by Heavy Supply

📈 Chart of The Week

Florida is one of the fastest growing apartment regions nationwide. Roughly 66,000 new apartment units delivered in the Sunshine State in the year-ending 1st quarter 2024.

📈 Modeling Your Success,

• Shop Underwriting Models

• 1-on-1 Underwriting Session

• Join Underwriting Mastermind

• Outsource Your Underwriting

📈 Are you looking to outsource your multifamily underwriting to an experienced analyst?

Why outsource your underwriting?

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Schedule a call with me today so we can discuss your exact underwriting needs.