Key takeaways
- Underwriting is a process, not a feeling.
- Every operating number must be verified or stressed.
- DSCR below 1.25 disqualifies the deal in most markets.
- Reserves and capex are not optional line items.
- Sensitivity analysis should drive the offer, not the asking price.
Core concepts
Income side
Verified rent rolls, market comps, lease term remaining, concessions.
Expense side
Tax, insurance, utilities, management, repairs, capex reserve, vacancy.
Capital structure
Down payment, loan size, rate, term, amortization, balloon if any.
Return metrics
Cash-on-cash, DSCR, cap rate, IRR, return-on-equity over 5 years.
Step-by-step framework
- 1Pull market rent comps from 5 sources, not 1.
- 2Verify expenses with actual tax bills and prior insurance binders.
- 3Set vacancy at 8% minimum even for stabilized assets.
- 4Add 5% gross rent to a capex sinking fund line.
- 5Run base, downside, and stressed scenarios.
- 6Submit offer at price that delivers target returns in downside scenario.
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Common mistakes to avoid
- Accepting seller pro forma without verification.
- Ignoring property tax reassessment at sale.
- Modeling 0% vacancy in 'hot' markets.
- Skipping the downside scenario.
Frequently asked questions
What return should I target?
8% cash-on-cash + DSCR 1.30 is a safe baseline.
How do I get true expense data?
Request trailing 12-month operating statements and tax bills before LOI.
What if the seller refuses to share numbers?
Walk. Or assume the worst expense profile in the market.
How long should underwriting take?
Initial pass: 15 minutes. Full underwriting: 90 minutes per deal.
Action checklist
- ☐Rent comps from 5 sources.
- ☐Verified tax and insurance.
- ☐Vacancy >= 8%.
- ☐Capex reserve >= 5% gross rent.
- ☐DSCR >= 1.25.
- ☐Three scenarios modeled.
- ☐Offer based on stressed scenario.
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