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Here are 3 rookie mistakes you want to avoid when underwriting commercial multifamily deals.

1. Overinflating Projections

There are many ways underwriters can overinflate projections in the underwriting model. All of which can make the deal look great on paper, but be unrealistic for what will actually happen after closing.

To name a few, using unusually high organic rent growth, failing to account for renovation downtime, and underwriting to dangerously low operating expenses can all over inflate the net operating income in your underwriting model.

2. Relying On Exit Cap Rate

We know that commercial real estate is valued using the net operating income and applying a market cap rate. Underwriters have to use realistic assumptions and apply a market cap rate to their analysis for where they expect cap rates to be 5 - 10 years from now.

While it’s impossible to know where cap rates will be next month, let alone 5 years from now, using a realistic market cap rate is always best practice.

If your analysis is relying so heavily on an aggressive sale, this could be overinflating your projections. In the scenario where the sale is less than expected, this could have a huge effect on the returns.

3. Taxes & Insurance

Increasing taxes 2% over the T12 number is not best practice! There is no rule of thumb to use for real estate taxes, but getting this number right is critical. We recommend calling the county tax assessor’s office to understand how taxes could be reassessed after closing. Or hire a property tax consultant.

Insurance is also another large expense item on your proforma. Underestimating insurance can have a huge effect on your returns. We always recommend quickly reaching out to an insurance broker for a quote.

We recommend reaching out to Jeremy Goodrich from Shine Insurance Company for quotes to save the most money on your multifamily deals.

Email: [email protected]

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