What is Underwriting?31 Jan 2022
Anyone who invests in commercial real estate (CRE) is buying a multi-million-dollar business secured by real estate. A successful business will generate a profit. A wise investor will be reasonably sure of profitability before investing.
Nashville: Thank You!
What is underwriting and why do we care?
Underwriting is the process of…
- Gathering financial and historical information about an investment.
- Gathering data about the location of the investment, including population trends, job growth, income growth, and crime statistics.
- Blending that information with our professional judgment (and guesses about the future).
… and using what we’ve gathered to decide whether buy or pass on the investment.
Most Important Question
This is the most important question in underwriting:
How do I take this piece of real estate and turn it into a business that makes money?
Many underwriting models are built with Microsoft Excel or Google Sheets. The math is not complicated, but the numbers are so closely related to each other than a small error within one cell can wreak havoc in more important cells further along the chain of calculation. When investing money, it’s important to protect ourselves against the butterfly effect.
Check out the above video for a 30-minute discussion (plus Q + A) about underwriting. Play the content at double-speed if you’re impatient. And feel free to contact me if you want to dig further. I enjoy conversations about underwriting and everything else related to commercial real estate investing.
I look forward to hearing from you.