Book 1: The Definitive Guide to Underwriting Multifamily Acquisitions
To start the year with a really exciting piece of literature, I read The Definitive Guide to Underwriting Multifamily Acquisitions. My wife and I have recently begun investing in real estate. With an eye on the future I wanted to get an idea of how larger buildings are analyzed. Instead of repeating the details of the book (which is quite detailed) I will go over some concepts I learned.
The book is a quick read if you like analysis of any kind. The author, Robert Beardsley, is a member of Lone Star Capital who practice what they preach. This book is a detailed look into their underwriting model.
Underwriting
I had no idea what underwriting involved until I picked up this book. The only interaction I had with the idea was when we bought our current house several years ago. I think it was similar to how most people view it: they just keep asking for more and more documents. Now it’s becoming more important as we look at houses in different areas of the country.
In effect, underwriting is financial analysis to make sure the property will work out in the buyer’s favor. There’s many inputs, but it reduces to viability.
The most interesting tidbit is that everyone has their own underwriting model. In retrospect this is unsurprising. It makes sense that everyone would have their own perspective.
Crowdfunding
With the advent of crowdfunded real estate platforms like Fundrise it’s important for people to know what they’re buying. I think this little book is helpful in understanding the terminology. For those of you lucky enough to be accredited investors, it’s even more important to spend the time vetting the deal maker’s underwriting.
Terminology
These are a few terms that were new to me:
- T12: The trailing 12 months of financial data
- Pro Forma: This seems to mean “as a formality” but in this book it’s used to describe the outputs of the underwriting process.
- Cap Rate: The most important number in commercial real estate. It’s defined as the Net Operating Income / Current Market Value. This is a deep topic.
Resources
The book mentions resources used in gathering data for the underwriting process. I won’t describe them all here, but I am leaving them as links so you can explore at your leisure.