How We "Underwrite" Apartments

Hey there,

How do you know if an apartment complex is a good investment?

Well…

How do you know if anything—like shares of a company—is a good investment?

You underwrite it.

“Underwriting” is just a fancy term for running the numbers. You’re analyzing whether the property (or company, or whatever else) is profitable—and if so, how profitable.

It may be profitable, but not profitable enough to be an attractive investment for you—though it might be a fit for someone else.

Now, depending on the complexity of the investment, the underwriting process can range from a quick back-of-the-napkin calculation to a detailed, multi-scenario model. That’s especially true for complex businesses—think software companies, diversified product lines like Apple, or commodity-driven operations like The Andersons or Marathon Petroleum.

But when it comes to simple businesses, like apartment complexes, underwriting doesn’t have to be complicated. In fact, it shouldn’t be.

To show how we do a quick “first pass” underwriting when looking at a new deal, I put together an off-the-cuff video walking through our process: how we find a deal, review the materials, and quickly run the numbers.

At Rust Belt Capital, our underwriting for the investments we make go much deeper than what I’m showing here.

We’ll forecast what the property might look like under different rent and expense growth scenarios, and build out Base, Best, and Worst case projections to evaluate the deal from multiple angles.

We also look at key metrics like Cash-on-Cash Return, Internal Rate of Return, and the assumed exit cap rate.

But when you’re just getting started, all of that detail isn’t necessary. The basic approach I walk through in the video can take you a long way early on.

Questions always welcome!

Nate & Steven
Rust Belt Capital, LLC

www.rustbeltcapital.com

_Disclosure:
Rust Belt Capital, LLC is not a Registered Investment Advisor. Investing involves risk, including loss of principal. Past performance does not guarantee or indicate future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. While the data we use from third parties is believed to be reliable, we cannot ensure the accuracy or completeness of data provided by investors or other third parties. Rust Belt Capital, LLC does not provide tax advice and does not represent in any manner that any outcomes described herein will result in any particular tax consequence. This is not an offer to buy or sell any security. Offers to sell, or solicitations of offers to buy, any security can only be made through official offering documents that contain important information about investment objectives, risks, fees, and expenses. Prospective investors should consult with a tax, investment, or legal adviser before making any investment decision. Distributions or profitable investments cannot and are not guaranteed. Not intended to be tax advice and should not be solely relied upon to make an investment decision.