I hear a lot of questions regarding underwriting multifamily deals. I underwrite a few deals a week and have made lots of mistakes, and thought I’d share some thoughts and a few excel models.
- Basics: At a minimum, in my opinion, an analysis for small multifamily should include some general information, a rent roll, an operating statement, financing information, and outputs. I generally like to have two year’s actuals and a pro-forma. The pro forma is built from the rent rolls.
- Simplicity: Also, I completely agree with Peter Lynch of A Simple Model–financial models should be as simple as possible. I also don’t believe that you should use another person’s model–you need to build it yourself and understand it thoroughly. I’ve seen waterfall models and syndication models that would take an average person weeks to link together. A mistake or two in that scenario would mean disaster!
- Cascading Models: I think it’s generally a good idea to have a simple “napkin” model that can help you determine if a deal pencils in general. If it works, run it through a slightly more complex spreadsheet. If that works, get it under contract, get your due diligence documentation, then run it through a more sophisticated model–one that you can print out and present to a lender or potential partners. This will save massive amounts of time underwriting deals that won’t work.
- Below are links to a simple model I’ve put together, and more complex models from other websites and blogs.
What are things you’ve learned underwriting projects? Do you have questions about financial modeling? Do you have a great model you’d like to share with others?