Back of the napkin underwriting, the 50 percent rule.

It goes like this. “Yeah we were having lunch and we were just talking about some ideas and started writing them out on the back of a napkin. And now we have this multi-million dollar company, brand, or product.”

All you need to know is what is the rent roll for a given property. If you can’t get the rent rolls, you can look also look at market rents and do an estimation.

Again, at this point in the process you are just trying to see if this particular property fits the criteria you are investing for. Your criteria and strategy for investing is something we have talked about extensively and you need to determine before looking at any properties.

So if you have the rent rolls, you now know how much income the property will or should generate. Once you know this number. Then you just want to subtract 50% percent of it.

50% is very conservative by most people. But when you add up all of the expenses such as maintenance, utilities, property management, cap-ex, etc. Then the money you have left over must cover your debt on the property and any remaining cash flow, if there is any.

You can do all of this on the back of a napkin. If you determine that this property may be a good fit, then you can take the next steps in the underwriting process and get into the details even more by getting the real data on the income and expenses.

So you would need to see the rent rolls and the T12. The rent rolls are the rents that the building are getting on each of the units. The rent rolls should include the lease date of each unit as well and in most cases the tenants name and information, even though that is irrelevant at this point in the process.

The T12 (trailing twelve): Is the income and expenses a property has had the last twelve months. You could also, get a trailing six as well, which would be the last six months. But you get the point.

Now that you have these two documents you can take the back of the napkin underwriting to actually underwriting to see if this a good deal.

The back of the napkin approach is a way for you to look at more deals and sift through them much quicker.

I hope this was helpful as you are looking at deals. Also, when it comes to single family home investing the metrics are not as simplistic. There rents as many variables and they can vary widely. We will talk more about these later.

To your success and your future.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s