We have an in-depth spreadsheet for underwriting deals. This spreadsheet is always getting fine-tuned and updated to ensure our underwriting gets better and better. A major part of our underwriting process is being conservative with our numbers. When we are underwriting, we want to be as accurate as possible. However, we also err on the side of being conservative. In many cases, we have likely not proceeded with a deal because our investor returns did not meet our expectations and targets. Our conservative numbers have pushed us away from deals that may have actually been a good buying opportunity.
While we admit we may have not proceeded with a deal due to our conservative underwriting, we like to look on the bright side. If we underwrite conservatively and win a deal, our goal is to “under promise and over deliver”.
There are many places we can use conservative numbers in our underwriting. If market data says that rent will grow by 6% in the next 12 months, we may only use 5% growth. If the T-12 says landscaping is $20,000 for the year, we will likely use a higher number, like $25,000. If the property manager says these units will rent for $1500, we will use a lower number. We like to underwrite conservatively because we do not want to make a projection that we feel is not accurate to our investors.
In our underwriting, we tend to lower the income expectations, increase expenses, and decrease the value of the price at the time of the sale. Obviously, our goal is to INCREASE income, DECREASE expenses, and INCREASE the sale price, but we want to be conservative when underwriting.