What is Underwriting in Real Estate for Multifamily Investment Properties?
Unfortunately, flashy brochures and ambitious forecasted profits might not always translate to returns for investors in a real estate syndication deal.
As the saying goes, if something looks too good to be true, it usually is, especially in real estate deals. That's why thorough real estate underwriting conducted by professionals in the field is one of the leading indicators of investment success.
Underwriting is essentially the assessment of each asset's risk, providing objective insights into the likely outcomes of a purchase. In this process, knowing what not to look for is just as important as knowing the critical signs of a quality deal before moving forward.
Keep reading to learn more about the underwriting process and how Viking Capital effectively underwrites multifamily property options to provide optimal payouts to its investors.
What Is Underwriting?
Underwriting is a finance term used in several economic contexts, including financial markets, real estate, and even personal banking. Historically, it referred to the process in which a financial institution would take on risk on behalf of another entity for a fee. Due to the potential risk, underwriting involves a thorough and data-backed research process.
For example, a bank might underwrite a loan to an individual by examining their financial history to determine an appropriate amount to allocate.
So, what is underwriting in real estate? In a multifamily investment property deal, an underwriter will assess a potential property through many factors such as age, occupancy rate, cash flow, state of the property, and location to determine whether it is a worthwhile investment and the level of risk involved. This process will also include an examination of financial history and demographic data.
In an investment deal, this is done on behalf of the investors pooling their capital to invest in an opportunity. The person or company instigating and completing this process is known as the underwriter.
How A Professional Investment Group Underwrites Deals
To obtain the best results when investing in multifamily, it's imperative that the underwriting is as comprehensive and as objective as possible. After further research, choosing a property that looks attractive from the outside may not be the best option for asset managers and investors.
Since the best deals require looking beneath the surface of what a multifamily property offers, we'll look at how Viking Capital reviews every aspect of a potential asset before embarking on a real estate syndication deal.
The Best States to Make a Deal
At Viking Capital, we've determined several of the critical areas we focus our investment efforts on concerning the various states. Real estate and financial regulation vary significantly from state to state; for this reason, it's one of the critical assessment criteria.
First, we invest in states with positive net migration encouraging business growth along the sunbelt region.
Additionally, we look for states that are business-friendly areas with positive legal and regulatory environments. Therefore, we don't only look at the state's current climate but also factor in any projected changes to regulations regarding the running of a company or the job market in general.
Companies will naturally flow to states where it's easiest to run a company which then creates flourishing job markets. For example, recently, we've seen an influx of tech companies moving to or launching in Austin, Texas.
The Market for Cities and Suburbs
After determining the focus cities for ideal investments, we then determine primary and secondary markets.
Concerning primary markets, we research demographics, job market migration, and other leading indicators of a successful acquisition. Primary markets are markets with established populations and a large GDP.
To provide investors with as much value as possible, we also consider secondary markets that show positive investment markers, such as the possibility of rent increases and migration.
The Job Market
Next, we consider the job market by examining the demographics, employment categories, and average income.
In this assessment, it's essential to consider the likelihood of ongoing employment in the general area. For example, a market with several governmental employees may be more recession-proof than a job market dominated by different professions. In addition, we're looking for markets with several active renters. Markets with a high average income may indicate a higher rate of current or future homeownership, creating a smaller rental pool and leading to lower occupancy.
Schools Near the Property
A highly regarded school near the multifamily syndicate opportunity indicates positive markers. Properties near schools tend to have:
- Higher occupancy rates
- Better access to amenities
- Family-friendly environments
- Longer-term renters (families tend to stay in one place with kids in school)
Due to this, we factor school, school reputation, and proximity into the deal assessment.
What Happens Once a Property Has Been Flagged as a Possible Opportunity?
On top of the strategic analysis above, we review all financial and practical data at Viking Capital. When underwriting a property, this process generally involves:
- Accessing financials for the property through a broker (often in the form of a memorandum)
- Looking back at past occupancy and other relevant data points (this is often the last 12 months)
- Analyzing the rent roll (or potential rental income)
- Continued market analysis and reviewing the deal with in-house strategies in mind
Viking Capital works hard to deliver real estate investors the best multifamily investing experience by choosing beneficial properties to fund and purchase. Once a property has been purchased, our investors benefit from payouts in the syndication.
Multifamily Real Estate Underwriting Multifamily Is a Crucial Process!
Investing in a real estate syndication can be a risk. From location to financial analysis and more, many steps are involved, from the initial idea to the purchase. In addition, when you invest in syndication, you are investing under the assumption that the managers know what they're doing.
That's why investing in an experienced team that understands the underwriting process from beginning to end is crucial! If you're interested in securing your financial future through multifamily real estate or in learning more about how real estate syndication can help ensure generational wealth for you and your family, reach out to a Viking Capital team member today.
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