Underwriting is the craft of turning uncertain inputs (rents, expenses, rates, cycles) into confident decisions. Do it well and you protect capital, reputation, and relationships. Do it poorly and small errors compound into big misses.
Here are eight common underwriting mistakes we see—and simple guardrails to avoid them:
1) Overestimating Rent Growth
The mistake: Assuming under-market rents “snap to market” in months.
Why it hurts: Overstates NOI and valuation; ignores rent-control, income levels, lease rollover, and renovation timelines.
Avoid it with:
Market validation: Check supply/demand, local income bands, concessions, and any rent regulations.
Realistic stabilization plan: Sequence unit turns, lease-up, and marketing; model downtime and re-tenanting.
Conservative growth: Use tempered rent growth and longer timelines to reach proforma.
2) Underestimating Expenses & Deferred Maintenance
The mistake: Relying on neat proformas while ignoring the roof, HVAC, plumbing, panels, or unit rehabs.
Why it hurts: Surprise CapEx, higher vacancy during turns, and permanent expense creep destroy returns.
Avoid it with:
Thorough Physical diligence: Walk units. Get inspections. Confirm age/condition of big systems.
CapEx roadmap: Budget scope, cost, and timeline; tie to vacancy and rent-ready dates.
Ops realism: Include management (often ~5% of GOI), onsite staffing where needed, and turns/make-ready costs.
3) Ignoring Realistic Vacancy Rates
The mistake: Modeling 0–2% vacancy when the submarket runs 5–8% (and small assets swing more).
Why it hurts: Overstates cash flow; stress increases when even one or two units sit vacant.
Avoid it with:
Use market rates: Pull current submarket vacancy and add buffer for property size/class.
Layer frictions: Include lease-up downtime, renovation downtime, and seasonal impacts.
Stress-test for Proforma Vacancy: Make sure to run sensitivity analysis with respect to your proforma vacancy.
4) Not Stress-Testing Financing & Interest Rates
The mistake: Locking rosy terms and ignoring rate hikes, IO burn-off, or lender loan sizing at current NOI.
Why it hurts: Lower LTV/DCR than expected; refi risk; cash flow shock when amortization starts.
Avoid it with:
Scenario runs: Rate up/down, IO vs. fully amortizing, different DCR tests (≥1.25x).
Underwrite to today: Size debt on current NOI and realistic vacancy; don’t assume tomorrow’s stabilization for today’s loan.
5) Using Seller/Broker Data Without Verification
The mistake: Taking T-12s and OMs at face value.
Why it hurts: Inflated revenue, deflated expenses, and optimistic “pro forma” can inaccurately price the asset.
Avoid it with:
Source documents: Utility bills, tax cards, insurance quotes, service contracts, payroll, rent roll tie-outs.
Third-party benchmarks: Cross-check rents, expenses, and comps with independent sources.
6) Forgetting Property Tax Resetting
The mistake: Rolling forward last year’s taxes when reassessment post-sale is likely.
Why it hurts: Tax jumps can erase cash flow.
Avoid it with:
Know the rules: Reassessment triggers, millage/effective rates, and historic growth.
Model forward: Project taxes at purchase price (and beyond) with realistic annual increases.
7) Overlooking Market Cycle Risk
The mistake: Forecasting stable occupancy/rents through job losses, supply waves, or policy shifts.
Why it hurts: Missed downside turns conservative deals into marginal ones.
Avoid it with:
Cycle context: Review past cycles locally and nationally; watch pipelines and absorption.
Downside cases: Build bear scenarios for rent, occupancy, and exit multiples.
8) Skipping the Exit Strategy Math
The mistake: Not testing early sale, delayed refi, or different exit cap rates.
Why it hurts: IRR and equity multiple are hypersensitive to exit assumptions.
Avoid it with:
Exit sensitivity: Vary cap rate by year, test pre-sale vs. post-sale NOI, and model early/late exit.
Refi realism: Stress-test refi cap rates, DSCR, and proceeds; ensure the deal still works if timing or terms shift.
A Simple Safety System (Use Every Time)
Multiple sources: Verify rents, expenses, taxes, and comps independently.
Conservative bias: Round risks up, not down; underwrite to what you can defend.
Sensitivity grids: Always run rate, rent, vacancy, and exit cap sensitivities.
Document assumptions: Capture the “why” behind each key input; future you (and your partners) will thank you.
Decision rule: If the downside case is acceptable, you might have a real deal. If only the base case works, keep negotiating—or walk.
Bottom Line
Underwriting isn’t about perfection; it’s about probability and preparedness. Avoid these eight pitfalls, pressure-test your assumptions, and you’ll make decisions that stand up to cycles, lenders, and time. To move faster with more rigor, use IntellCRE to centralize comps, auto-model taxes and financing, and run one-click sensitivity and exit scenarios—so your downside is clear and your upside is credible.