3 Steps for a Quick Analysis

You look at a ton of deals each week.

You don’t want to spend 4 hours underwriting a deal that ultimately will not pencil out.

As an underwriter, there are various methods you can use to do a back-of-the-envelope analysis (quick analysis).

Use these 3 methods to analyze your next multifamily deal in 10 minutes or lessThen you can decide if it’s worth looking into further.

Make a Proforma

With any quick analysis, I think creating a quick 5-year proforma is extremely helpful. This helps paint the true picture of what a full underwriting would show.

Some underwriting models do their quick analysis by dividing the NOI by the market cap rate. The problem is, if the property has serious upside potential, doing this arbitrary calculation will have you missing out on good deals.

I like making a quick 5-year proforma as this helps give me a birds-eye view of the deal.

Gross Rent Multiplier

The gross rent multiplier (GRM) reflects the number of years it would take for a particular property’s gross rental income to pay for itself.

Cap rates tell you nothing about the property’s potential. GRM gives real estate investors a quick way to evaluate a property’s investment potential, but a cap rate shows a property’s return relative to current rental income.

There is no single “good” gross rent multiplier due to market differences and many variables that come into play. However, a GRM of 4-7 is usually considered ideal.

GRMs will be higher in more competitive markets and lower in less competitive markets.

GRM = Fair Market Value / Gross Annual Income

Stabilized Yield on Cost

This is especially useful in development deals as well as value-add projects. In real estate investing, the yield on cost is a property’s net operating income divided by its total acquisition cost.

This metric helps answer the question if the return on capital invested in this project is sufficient to overcome a project’s high up-front cost.

YOC = Net Operating Income at Stabilization ÷ Project Cost

We created the ultimate back-of-the-envelope underwriting model for you to quickly screen deals.

It automatically calculates a year-by-year proforma and has various metrics to let you know if the deal has potential or not.

Download Model