Some people in the real estate business fall in love with location, design, or amenities. However, in terms of investments it’s all about the numbers. The process of crunching all of the numbers associated with a real estate investment is called underwriting. So I thought it would be helpful to give you a glimpse of what goes on behind the scenes when we evaluate a real estate investment. First, here is a bit of information about our underwriting process we use to determine whether or not a property is a viable candidate for further due diligence and acquisition. First, the proper information must be obtained from a variety of sources. For on-marketed deals, listing brokers will put together an offering memorandum (OM) which usually contains a brief financials and overly optimistic projections, called a “pro-forma” analysis. We completely ignore this data and request the seller to provide their ACTUAL financial data in the form of a trailing 12 month profit/loss statement as well as a rent roll, which provides unit type, rent, square footage, move in date, and lease expiration date for every single unit on the property. A rent roll is also the only way to properly calculate the current physical and economic vacancy. Using the real numbers provided by the seller allows us to input relevant data into our in-house underwriting spreadsheet and perform comparative market research in order to determine market rents, market vacancy rate, and market expenses such as property taxes, insurance, and property management fees. We underwrite properties using this spreadsheet and process daily. If you are interested in seeing my personal underwriting spreadsheet and would like to learn more about it, please email me at rob@MenloAthertonDevelopments.com.
If any of these potential deals are a match for our investment criteria, we move forward by underwriting the investment again through a completely different analysis tool, used by our mentor to acquire more than $260,000,000 of apartment complexes. Next, we send our spreadsheets to our mentor’s underwriting team for external analysis and input. At this point, if the property still passes muster then we submit a letter of intent and negotiations commence in an effort to get into contract at the best possible price/terms. Once under contract, we perform inspections, property and market due diligence and financial auditing to have full confidence in our investment.