RE underwriting thread. Here is a framework to think about the major levers and inputs. Thanks to @jdub_re for his tweet on trending rents that sparked this idea

Let’s start w the fun part revenue - In place rents - verify them all, get your hands on the leases for multi family or an estoppel for commercial. If you’re the lender in commercial. You’ll want an SNDA.

Forward rents - using CoStar predicted rents adds zero value, use at least 3 sources and make informed adjustments - if it’s value add. You need to find the 3-5 comp properties post renovation and use that as expected rent and compare that to your estimated rent bump

Renovation - make sure you’ve vetted these numbers w a GC. Unless you’re super high volume or know exactly what subs cost you need to speak to a GC

Overall market rent growth - it’s going to be pretty hard to argue better than ~2-2.5% in the long run unless there are outside factors like huge population growth, other new construction in your sub market driving demand or something to that effect

let’s talk exp - property mgmt- start here bc you should have a property mgr lined up before you bid a deal & they should sign off on the numbers. After all they need to go make this work. 2-5% of rev dep on asset size Ideally there is a structure to incentivize them out outperf

Taxes - make sure you reset the tax. Ie move it higher. Use a tax consultant. Don’t guess. At minimum. Get the mill rate and find out what assessed value as a % of transaction value is. Is there an abatement? When does that end? Growth is prob 5-10% yr

Insurance - go get a quote, don’t assume the old rate will carry over. Insurance and taxes both have upward pressure right now. I’ve seen some quotes +25-40% y/y. Get the right starting number then grow is 5-10% per yr

Utilities - how old is prop? Can you make energy saving updates? Are leases gross or net?

Payroll - do you need onsite folks or will the property be covered by a regional manager - will you handle leasing internally or hire a broker?

R&M - don’t plug $/sqf or $/door. How old is the property. What has been done recently? If it is value add how will that change this?

Debt - RE generally uses debt as the majority of capital for a project. Make sure you have secured your debt. From a bank or debt broker. If you need some brokered debt go shoot @ccchaircut a dm. Will you have a PG. I/O or Amo?

Cap rates - at least 50bp of expansion on the exit. If you’ve reset taxes and made other adjustments to reflect your ownership, your yr 1 CF is not going to match the brokers. That’s fine.

Okay. If you’re still with me thanks! Now we have cf and an exit cap rate. We can begin to see what returns looks like and compare that to the BOV, asking price, stated cap rate...

If you’ve done this right, w good assumptions there is ~20% chance your deal will pencil. But that’s good. You have a realistic CF profile estimate. The real work begins.

You can start tweaking growth and absolute estimates and you’ll quickly learn what will break the deal and what will make the deal...

Now decide which risks you are reasonably willing to assume to make this deal happen...can I save on this and I push on that. You get the idea...

Make those adjustment and BOOM...you have an offer price. Or at least what you believe you can pay. If you submit it and win. Congrats your underwriting was more aggressive than everyone else’s...Better hope you were conservative enough to make it work...

Thanks for staying w me. This list isn’t exhaustive. But in 5 min it’s the stuff that came to the top of my head. And there are 100 diff ways to approach this. It’s what works for me.