Where SFR Underwriting Differs From Multifamily

Underwriting a build-to-rent property is not much different than underwriting an apartment asset. Many of the costs, expenses and vacancy trends are similar—but there are a handful of disparities. Walker Dunlop’s Andrew Dalgliesh highlighted some of the key differences in build-to-rent underwriting in the Beyond the Basics for Build-to-Rent webinar.

Turnover is the most notable difference in underwriting of the two assets. While BTR properties have lower turnover rates, the larger size of the property often drives up the price to turn the unit. The higher cost is actually enough to offset the gains in occupancy. “Turnover is an interesting expense. The turnover ratios tend to be significantly lower than that of apartments, but the turnover costs tend to be higher because the larger unit common areas lead to greater expense for painting and floor replacement,” said Dalgliesh in the webinar. “The increased turnover expense actually offsets some of the increased savings that you would expect from the lower turnover rates.”

Lower density and larger unit size also impacts external landscaping costs—which are typically higher than a standard apartment property. “This is one of the biggest difficulties in underwriting BTR assets,” says Dalgliesh. “This is a relatively new asset class, and we do not have the availability of third-party comparable expense data that we do for traditional multifamily. As such, we treat the underwriting for these expenses similar to what we do for traditional multifamily by relying heavily on the historical operations of the property.”

Property taxes are also challenging, given the larger property size. “With taxes, we will verify with actual tax bills, which can often be more difficult than BFR because some jurisdictions will assess each property individually,” says Dalgliesh.

While the asset class is new and has limited historical data for underwriters to evaluate, lenders are still excited about the opportunity in the space. Dalgliesh notes that strong demand and high interest from Fannie and Freddie has helped lenders get behind the asset class. In addition, there are favorable expense ratios and no DSCR or LTV pricing adjustments because these are larger assets. “This helps us lean into interest-only terms for build-to-rent assets.”