Real estate returns: How underwriting plays a role

By The ArborCrowd Team
Mar 13, 2020

Members of the ArborCrowd underwriting team perform a thorough analysis of every property that comes across their desks to verify the feasibility and potential real estate returns of the transactions.

This entails reviewing revenues and expenses, calculating the net operating income, and evaluating financing options to build out an accurate pro forma. Here are more details on this process.

Reviewing Revenues, Expenses and Net Operating Income

To begin creating a pro forma, also called a financial model, real estate professionals first validate the rental income of a property.

A property’s rent roll, which is a list of tenants, rents paid, concessions, vacant units and unit types, is necessary to obtain the asset’s “gross revenue” or monthly income. Subtracting concessions (such as a month of free rent), vacancies and credit loss from gross revenue, leaves the property’s “effective income,” which is the actual income a property will earn.

Next ArborCrowd underwriters look into a property’s operating expenses by reviewing the current owner’s “trailing 12” (T-12), a document that details the property’s historical operations over the prior 12 months. The T-12 helps clarify the types of expenses a property has incurred and can expect in the future, and may also help identify expenses that are being mismanaged. Additionally, property taxes, which are typically one of the largest expenses of a property, are thoroughly examined. The sum of all of a property’s expenses are referred to as the “total expenses.”

Photo of two people looking at a performance graph

After obtaining the property’s effective income and total expenses, simply subtracting those two figures reveals the property’s “net operating income” (NOI). NOI is used to discern how much money a property currently earns and how much the real estate returns could be if the business plan is successful. Ideally, ArborCrowd’s underwriters want to identify when a property’s base rents are below market and ripe for an increase, because maximizing rental income will increase NOI. Sellers and buyers use NOI to agree on a purchase price, and lenders use it to determine the size of the loan they are willing to issue for the project. Therefore, it is necessary for ArborCrowd’s offerings to project strong NOIs.

Learning the size of the loan amount is important because it will indicate how much equity is needed to fund a deal. In addition to the loan size, ArborCrowd explores what loan types and terms are available for the project, such as short-term financing (also often referred to as bridge loans) or long-term financing. Typically, lenders will issue short-term financing for a project that is ground up or has significant renovation components.

ArborCrowd may work with other members of The Arbor Family of Companies that are national real estate lenders to obtain the best loan terms for a project. After debt service payments for the loan are subtracted from the NOI, underwriters are left with “project cash flows” — or residual money after all expenses. Cash flow from projects may be reinvested into improving the property or they may be distributed to investors. To complete the pro forma, ArborCrowd’s underwriters will calculate the potential terms of a loan refinancing and a sale of the property.


It is necessary to properly evaluate the finances of a properties to accurately gauge whether it has the potential to produce successful real estate returns for investors. The ArborCrowd Underwriting Team looks over all aspects of a property’s finances to ensure that deals meet our rigorous standards prior to bringing it to the crowd. Investors can review the pro forma projections of every deal in the corresponding offering materials prior to investing their hard-earned money.

To learn more about the underwriting process, see the article Smart Investing Starts with Solid Underwriting.