Underwriting is the analytical process of estimating a property’s value and projecting its future performance. Good underwriting is conservative, comprehensive, and transparent about its assumptions. Bad underwriting is optimistic, selective about which costs to include, and designed to justify a price that has already been decided. RIYT’s underwriting is built around the former philosophy.
Step 1: Revenue Underwriting
We begin with current in-place rents — not market rents, not what we hope to achieve after renovation. From there, we apply a vacancy factor based on current submarket vacancy rates (not the property’s potentially temporary performance) and deduct credit loss (a 1–2% reserve for non-payment). The resulting Effective Gross Income is our starting revenue assumption.
Step 2: Expense Underwriting
We itemize every expense category: property taxes (using the post-purchase assessed value, not the current rate), insurance, property management, maintenance, capital reserves, utilities, landscaping, snow removal, and administrative costs. We do not use the seller’s expense history uncritically — sellers often defer maintenance, self-manage to reduce reported expenses, and omit one-time costs. We normalize to what a professional operator would spend.
Step 3: Debt Structuring
We model financing conservatively — typically using 55–65% LTV and current market interest rates plus a 50–75 basis point buffer for rate uncertainty. We underwrite to the note rate, not the interest-only period rate, to ensure the deal performs on a fully amortizing basis.
Step 4: Returns Analysis
With revenues, expenses, and debt service established, we project cash-on-cash returns, IRR (at multiple exit cap rate scenarios), and equity multiple across 5- and 7-year hold periods. We require that all projected scenarios produce acceptable returns before proceeding. If only the optimistic scenario looks attractive, we pass.