THE THREE MOST IMPORTANT WORDS IN INVESTING ARE MARGIN OF SAFETY.
- Warren Buffett
STEP 3 Underwriting The final step before moving forward with your next multifamily investment is to evaluate the deal itself. Underwriting is the financial analysis process of real estate investing and derives return projections relied upon to make a purchase offer or relied upon by investors when making a passive investment with a sponsor.
The best way to learn to underwrite is by familiarizing yourself with an underwriting model, such as Lone Star Capital’s which is available for free on their website www.lscre.com, and begin underwriting deals as they come across your desk. The next step in learning the basics is to review your underwriting compared to others’ models to see where your assumptions differ. As a passive investor, a quick review of a sponsor’s underwriting can be extremely illuminating in helping to make the decision to move forward with an investment. For those interested in a deep dive into multifamily underwriting, you can buy Rob Beardsley’s The Definitive Guide to Underwriting Multifamily Acquisitions , available on Amazon. With the right knowledge and strategy, investing in multifamily can be a tremendous addition to your investment strategy or even become your main source of income.
Underwriting is one of the most important aspects of multifamily investing. Proper, conservative underwriting can save an investor from jeopardizing their retirement or career. Warren Buffet often explains the key to making a smart investment is to ensure the investment has a sufficient margin for error. This means if some of the assumptions of the investment turn out to be too ambitious, the investment still can perform and most importantly, avoid a permanent loss of capital. Underwriting can be a complicated process which includes market research, rental and sales comparables, putting together pro forma revenue and expenses, as well as structuring and evaluating debt and equity. However, the basics of underwriting should be mastered by all investors regardless of whether they are active or passive.
ROB BEARDSLEY Founder Lone Star Capital
Rob founded Lone Star Capital in early 2018, a multifamily investment firm focused on acquiring and operating workforce housing throughout Texas and the Southeast. Since then, Rob has been involved in over $100M of multifamily acquisitions and published the number one book on multifamily underwriting, The Definitive Guide to Underwriting Multifamily Acquisitions . He has written over 50 articles and hosts The Capital Spotlight podcast.
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