You should do your research before making any investment, no matter if you are a new or experienced commercial real estate (CRE) investor. You might have questions about the property's current condition, cash flow, value, and potential income.

CRE investors use underwriting to answer all these questions and more. In addition, lending institutions use underwriting to determine loan terms. You may be familiar with this term as a borrower. The underwriting process for you is similar because it involves evaluating risk.

Here are the basics of CRE underwriting.

What Is Underwriting And How Does It Relate To CRE?

While there are many things that the term "underwriting" can mean, for commercial realty, it refers to "the process of fully 'diligencing' a potential transaction." You need to get to know your project team, understand their business plan, and examine the market conditions and trajectory of the market. You also need to identify structural needs and drill down into potential cash flows for the property, both in-place as well as upon stabilization.

Underwriting, in the end, is a way of determining the viability of a business plan, identifying potential risks, and anticipating the returns.

What Is Underwriting?

Underwriting is an investment tool that can help you make good decisions as a commercial real property investor. The underwriter reviews all data, including the business plan, project team, market conditions, and physical needs. It will then use that information to determine the asset's future and current value.

The underwriter will determine an asset's as-is valuation and in-place cash flow, as well future cash flow potential and value potential.

CRE investors can use key figures such as the property's net operating income or value to determine if a deal is worth exploring. In addition, underwriters might need information about an existing property, such as current tenants' expiration and renewal probabilities, projected market rents for building as in-place leases expire, and expected costs of renewing or replacing existing tenants.

When estimating future rents or cash flows for developments, you will need to consider everything, from market conditions to construction costs.

What CRE Investors Need to Know

Although underwriting is time-consuming and can require a lot of effort, the knowledge you will gain will allow you to make better decisions. You should be prepared to work hard.

He advises that you take the time to visit the asset and talk to tenants as well as the property management company. Also, tour the market to compare properties. These will all assist with underwriting data collection. The more data you have and the data points you can verify, the more accurate your overall projections.

Aim small, but miss big." A 2% shortfall in projected cash flows is much more acceptable than a 20% gap.

These Are The Steps To A Successful Underwriting Process

Begin by working with a professional underwriter or commercial real estate broker. This will help you compile a list of items and third-party reports required to conduct a thorough underwriting.

Fundrise, an online platform for real estate investments, reports that it has over 350 data points in its detailed checklist. These are derived from site visits and a study on comparable properties. A comprehensive appraisal is also done. The legal/organizational structure is then set up.

Here are some strategies to remember once you have a team and a game plan in place:

• Don't Wait:

  While one can underwrite transactions in as many hours as they wish, being able to efficiently and quickly underwrite potential transactions gives you an advantage in today's market, where high-quality CRE opportunities are highly sought-after and highly competitive. He adds that an experienced underwriter should be able to provide feedback within 24 to 48 hours after reviewing the opportunity.

• Go In-Depth:

  After the initial review, you can expect to go through a detailed underwriting process to verify each component of the transaction. "We will tour the asset and examine the market. We will review all relevant source documents, including bank statements, CAM reconciliations, and tenant leases. we will also engage third-party reports such as engineering reports and appraisals.

• Be Patient:

  Depending on the property and the size of the deal, full underwriting can take up to four weeks. Do not rush, as a detailed report can save you from costly mistakes.

You shouldn't enter into commercial real estate investments without thoroughly vetting it. You can be confident that your investment decision is made in the best way possible by going through an extensive underwriting process.