Use these 4 Items to Sharpen Your Underwriting

1. Trailing 12-Month (TTM) Financials

This is a crucial piece to have when analyzing a deal, especially if it is the first time you are looking at it.  The reason this is such an important file to obtain is because it lays out the most recent 12-month profit and loss for the property.    The T-12 financials show you a month-by-month breakdown for both the income and expenses.  You can now use this to assist in more accurately forecasting your pro forma.  

2. Rent Roll

The rent roll is useful because it will show you the current rents that tenants are being charged.  This can be used to accurately forecast your top-line revenue for each month as well as understand the current vacancy rate.  Most rent rolls will also have the leasing information for each tenant.  Having that information is beneficial because you can use it to determine your renovation schedule, lease renewals/rent increases, and understand whether a tenant is a long-term or short-term renter. Pairing the rent roll with the T-12 financials will allow you understand how the building is performing and will help formulate a business plan for that specific deal.

3. Offering Memorandum

The Offering Memorandum (O.M.) is a document that the broker will send to potential investors.  This document contains legal material, marketing material, an executive summary, area demographics, financial summary, projected returns, sale comps, rent comps, and pictures of the property.  This is a great document to read through as it will help breakdown the market, property, and upside it may offer. As a rule of thumb, don’t take the brokers pro forma numbers as gospel.  Most times they will overstate the projections and make the deal look rosier than it may actually be.  Always resort back to the T-12, rent roll, and personal research to derive your own projections that you can then compare to the brokers.

 4. Local Property Taxes

This is a very important piece to properly fill in when underwriting properties because it can make or break the deal. Taxes can affect the deal because it is likely that they will increase an exorbitant amount depending on the way that specific state assesses properties as well as what the local property tax rate is.  Again, this varies from state to state, so make sure to educate yourself on how your state assesses properties as well as the local tax rate to determine a new effective property tax amount for the year. This is one expense that you need to manually adjust instead of using the current property taxes in either the T-12 or O.M.