The Underwriter's Playbook: Essential Documents, Key Professionals, and Data Challenges in Multifamily Real Estate

I always say that financial models will only output the quality and accuracy that you input. Underwriting multifamily properties is a meticulous process that involves gathering, analyzing, and verifying extensive data to create accurate results though. Understanding the various documents required, the professionals involved who can help estimate costs, and the challenges faced during data collection and input is crucial for creating accurate results. This article explores these components and provides insights into the verification processes that ensure the integrity of the data used in underwriting multifamily properties.

Key Documents in Multifamily Underwriting

1. Trailing-12 (T-12) Financial Statements

Purpose: The T-12 provides a detailed overview of the property’s financial performance over the past 12 months from income and expenses.

Challenges: Analyzing the T-12 requires identifying non-recurring expenses and seasonality in income and expenses to ensure accurate projections. Most of the time a T-3 will be used for income and T-12 expenses to help adjust for up to date income and average expenses. If the property had just increased additional income, you may want to adjust for that.

2. Rent Roll

Purpose: The rent roll details each unit’s rental income, lease terms, and occupancy status.

Challenges: Verifying the accuracy of lease terms and current rental rates is essential. Discrepancies like concessions can impact projected revenue. In addition you'll want to look at when the leases are up for renewal and if they are "stacked" in a short timeframe. If a few tenets decide to move out your vacancy will be high and decrease revenue.

3. Inspection Reports

Purpose: These reports assess the property’s physical condition and identify needed repairs and maintenance. Findings on structural integrity, HVAC systems, plumbing, electrical systems, interior units and common areas can be used to negotiate a better purchase price.

Challenges: Integrating inspection findings into CapEx budgets requires precise estimation of repair costs and timelines. This requires having a keen eye for construction costs as an underwriter or having a contractor who can give a quick estimate based on photos.

4. Market Analysis Reports

Purpose: To provide an understanding of the local real estate market and competitive landscape including data on rental rates, occupancy levels, and market trends in the area.

Challenges: Ensuring the data is current and accurately reflects the local market conditions is crucial for reliable underwriting. Resources like CoStar (The commercial "Zillow" but with way more data.

5. Property Tax and Insurance Documentation

Purpose: Tax assessments, insurance policies, and premium breakdowns provide information on annual property tax obligations and insurance premiums which are the two largest increased expense line items once you buy a property due to the reassessment.

Challenges: Estimating future tax increases and ensuring adequate insurance coverage while maintaining cost efficiency. You'll need a good insurance broker and tax attorney who can accurately gauge the new costs.

Verification Process

1. Cross-Referencing Data

Method: Compare data across different documents, such as rent rolls with lease agreements and T-12 statements.

Purpose: To ensure consistency and accuracy of income information.

2. Third-Party Validation

Method: Engaging independent third parties, such as tax consultants, debt broker, insurance broker, legal team, property agent, property management and contractors to review and validate estimates, data, costs and timelines.

Purpose: To provide an objective assessment and identify potential discrepancies.

3. Sensitivity Analysis

Method: Testing the underwriting model under different scenarios to assess the impact of varying assumptions like vacancy, loss to lease, income/expense escalators, financing structures and return splits.

Purpose: To identify potential risks and ensure robustness of the model.

Conclusion

The process of underwriting multifamily properties involves navigating a complex array of documents, collaborating with various professionals, and overcoming significant data challenges. By meticulously gathering, analyzing, and verifying data, investors can develop accurate and reliable projections. This detailed approach ensures informed decision-making and helps mitigate risks, ultimately leading to more successful multifamily real estate investments. Leveraging professional expertise and advanced analytical tools can further enhance the accuracy and efficiency of the underwriting process, providing a solid foundation for evaluating potential deals.

Author: Nicholas Abraham

About: I love creating income with multifamily real estate. I hate selling myself and paying taxes. Here are a few quick facts about myself and my work.

1. Originally from Columbus, OH, I graduated early with a B.S. Economics & Finance and currently reside in Charlotte, NC as a full time multifamily investor with +250 units of transaction experience.

2. I have an unbreakable passion for personal finance that was forged at a young age when I realized I was making more money in my Roth IRA than bailing up hay on a farm in the grueling heat of summer and have been trading equities since 2009.

3. I went in and came out of the rate race from some well known Fortune 500 companies and learned everything I needed to know about Corporate America taking key concepts to success like systems and processes through lean six/ sigma.

4. Had my first breakthrough and helped scale a start up company to 8 figures within 18 months.

5. Hard lessons have been learned. After a hurricane I realized I should be raising capital and in a better industry. Eventually had my second breakthrough flipping real estate.

As an investor myself I like to educate others on the many benefits of real estate and partnering to create passive streams of income together. I hope you found value here today and please reach out with questions or topic suggestions!