When we are talking about underwriting in this context, it means evaluating and assessing the risk of investing in a a multi-family real estate deal. The main thing investors looks for when using these kinds of templates is if the deal can produce sufficient returns given the required investment and assumptions about future operating cash flow as well as at what occupancy levels and/or debt service levels does the deal not make sense anymore. Not making sense means negative operating cash flows and/or negative cash flows after debt service.
Relevant Templates:
- Multi-family Real Estate Model (annual only)
- Advanced Real Estate Underwriting Model (acquisitions or development)
- Both of these contain IRR hurdle waterfalls.
A good multi-family underwriting template should include comprehensive information and analysis to evaluate the financial feasibility and risks associated with the investment. Here are some key components that make a good multi-family underwriting template:
- Property Information: Include the property details such as address, size, number of units, unit mix, amenities, and any relevant market data. This section provides an overview of the property and its characteristics.
- Financial Projections: Include projected income and expenses for the property. This should cover potential rental income, vacancy rates, operating expenses (property taxes, insurance, utilities, maintenance costs, etc.), and other revenue streams (parking fees, laundry income, etc.). Financial projections help assess the property's potential cash flow and profitability.
- Rent Roll: Provide a detailed breakdown of the current rental income, including information on each unit, such as unit number, tenant name, lease terms, monthly rent, and lease expiry dates. The rent roll helps evaluate the stability of the property's cash flow and identify potential lease expirations or rent escalations. This is also a good reference to build value-add opportunity summaries based on existing vs. pro forma rent and the resulting growth opportunity.
- Operating Expenses: Break down the property's operating expenses, including property management fees, repairs and maintenance, utilities, insurance, property taxes, marketing costs, and other relevant expenses. This section helps in estimating the property's operating costs and evaluating its financial performance.
- Capital Expenditures: Consider major capital expenditures, such as roof repairs, HVAC system replacements, or significant renovations. Including these expenses helps assess the property's long-term maintenance and improvement requirements.
- Debt Financing: Outline the financing terms, including the loan amount, interest rate, loan term, amortization schedule, and any prepayment penalties. This section helps evaluate the impact of debt service on cash flow and profitability. If you want to get fancy, add in an option for a REFI event at some point in the future.
- Investment Returns: Calculate key investment metrics like cash-on-cash return, cap rate, internal rate of return (IRR), and equity multiple. These metrics help assess the property's profitability and compare it to other potential investments. You can do a DCF analysis as well and use the WACC as your discount rate. If this is a joint venture, you need to make sure it is clear what equity contributions the GP and LP are responsible for, any related acquisition / asset management fees, and what the expected cash distributions are estimated to be for the GP and LP. The template should reflect the operating agreement terms and account for any preferred return hurdles as well as what happens to cash flow on capital events (refi or exit).
- Sensitivity Analysis: Perform sensitivity analysis by considering different scenarios and variables such as changes in rental income, vacancy rates, or interest rates. This analysis helps evaluate the property's resilience to market fluctuations and its sensitivity to key assumptions.
- Market Analysis: Include information about the local market, such as rental trends, supply and demand dynamics, population growth, job market, and any other relevant data. A thorough market analysis helps assess the property's competitive position and potential for future growth.
- Risk Assessment: Identify and evaluate potential risks associated with the investment, such as regulatory changes, economic downturns, tenant turnover, or changes in market conditions. Assessing risks helps in making informed investment decisions and implementing risk mitigation strategies.
Remember, a good multi-family underwriting template should provide a comprehensive and detailed analysis of the investment opportunity. It should be adaptable to different properties and markets while allowing for sensitivity analysis and risk assessment.
Article found in Real Estate.
