How BFR Underwriting Differs from Multifamily
By Paul Bergeron
June 07, 2022 at 08:21 AM
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Industry experts acknowledge there are some mild similarities and share the nuances in their calculations.
To state the obvious, the booming build-for-rent market is attracting a lot of investment. And while the category shares many similarities with multifamily, for those new to the sector there are also some differences that should be highlighted, starting with underwriting.
In its recent Multifamily Report, Walker & Dunlop pointed out that many of the analyses in income are the same, as are many of the expenses: utilities, insurance, administrative, advertising, and payroll, to name a few.
“It’s important to keep in mind that BFR is a relatively new property type, with limited historical data and comparables in areas like expenses and rent,” Walker & Dunlop wrote. “This may pose underwriting challenges, depending on your market and lending partner.“
Lower density of BFR properties increases landscaping costs and impacts land valuations, and historical comparable data for areas such as repairs and maintenance may be limited, according to the report.
BFR properties outperform multifamily in terms of turnover rates, coming in at closer to 30 percent compared with the 40 percent to 50 percent for multifamily in 2018–2019, which excludes patterns established during the pandemic when multifamily dropped to one third.
Interestingly, public REITs reported turnover of approximately 45 percent in 2021.
Higher turnover costs, however—sometimes 30 percent to 40 percent higher—may wear away these cost savings.
Benjamin Kadish, president, Maverick Commercial Mortgage, tells GlobeSt.com “that physically, there may be no difference between the structures, but the homes are rented by a single owner of multiple properties; this results in both underwriting and operational differences.
“For example, the maintenance is handled by property owners of a large number of units, rather than by the individual occupants. Underwriting also needs to address that zoning may be different, as the municipality may need to approve that the properties can be rented, rather than sold on an individual basis.”
Jim Jacobi, president, Parkland Residential, tells GlobeSt.com that there is not much market data available for BFR because it is a relatively new property type.
“Therefore, my BFR underwriting always starts with a market study analyzing the supply and demand ratio within the for-sale market,” Jacobi said. “I know my project will be a good investment if the study proves demand far exceeds supply on for-sale homes.”
Jacobi said he next relies on vacancy rates and monthly rental rates of nearby Class ‘A’ apartments.
“I add a 15% premium to the monthly rental rate for BFR and then calculate my NOI and DSCR ratio with those projections. I believe this provides a safe and reliable underwriting to move forward with the project.”
Mark Fogel, president & CEO, ACRES Capital, tells GlobeSt.com that build-for-rent properties tend to be higher than those of a traditional multifamily property, and therefore must be underwritten as such.
“We normally look at median income within the market’s given demographic,” Fogel said. “With BFR, we look at factors that point to population and income growth, ensuring that those numbers fall in the quartile just above the median.
“When it comes to repairs and maintenance contract services, it’s a little challenging to calculate that line item. We’ve found that tenants of BFR properties seem to have more of a sense of ownership and take better care of their units overall. However, there are other costs to consider—such as landscaping—that cover a larger area of the property. In all, the expenses tend to line up with traditional multifamily.”
Kadish said that BFR units are typically larger than apartment units, which means the reserves will be higher per-unit than on conventional apartments. An industry benchmark for build-for-rent reserves is $500 per unit per year, he said.
Replacement reserve requirements tend to be lower for BFR properties, with components that differ from multifamily properties, such as central vacuums and power washing.
“As most BFR assets are newer properties, big-ticket maintenance items won’t drive up these reserves until these properties age—say 10 to 20 years from now,” Walker & Dunlop wrote.
Fogel said, generally, replacement reserves are similar across the board, except for one caveat: the larger areas covered.
“We generally underwrite replacement reserves about 20 percent higher for BPW versus traditional multifamily mainly due to the larger areas covered for things like paint,” Fogel said.
“When it comes to other items such as appliances, whether a unit is a studio or a three-bedroom, they would only be replacing one oven or one refrigerator, so it would essentially be the same.”
Kadish said the value of the properties should be appraised in two ways: As a for-rent unit, and also as a home for sale individually, in case the owner decided to sell the homes to an individual or portfolio buyer.
Walker & Dunlop cautioned to be aware of and prepared for tax implications, particularly in the case of individual detached homes.
“In these cases, appraisers may be looking at home values in adjacent areas and neighborhoods, which are typically higher,” according to its report.
BFR and traditional multifamily properties are similar in many areas of asset management, such as inspection protocols, payment tax, and insurance impounds. With multiple properties in a BFR portfolio, however, “insurance monitoring could be more complex, and property inspections may take longer to complete.”
For BFR appraisals, Fogel employs a multifaceted approach, applying comps from non-traditional products as there usually aren’t direct comps to use.
“We pay attention to similar for-sale product, competing Class A garden-style apartments or traditional single-family homes that are being rented out by owner.”
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