When you are looking at long term real estate, you have to KNOW the area, going rate for rents, and improvement opportunities to improve cashflow. You will not only be making a commitment after you take it down, but you will also need to put a great deal of time in pursuit of the deal. With that said, underwriting the deal is very important.
When a bank underwrites a deal, they will determine how much exposure the deal will give them and whether it’s a risk the lender wants to accept. The great thing about deals in excess of $1MM, the property itself is used as collateral against the funds you are borrowing. The bank will look at you, your experience and liquidity, but the property itself is an important aspect to the loan. They know that if you or the economy falls on hard times, the larger deals will cashflow fine – as long as it’s being run properly.
I personally use a couple of models when looking at deals. I also leverage several underwriters at the bank when reviewing a deal so I can verify my worst case scenario and make sure the deal will be profitable. You need to remember that the bank is a partner on the deal and they want to see it succeed just as you do.
Before I even get into the underwriting, I ask myself three questions:
1) Do you really want to be stuck with this deal for the long haul?
2) Will it support my investor cashflow targets?
3) Can I exit the deal with profit for me and my investors?
This is just meant to be a short overview of what I consider. If you guys are interested in learning more about underwriting, please let me know in the comments by saying “Yes”. I can do a longer video on the subject.