Underwriting for Reserves / Replacements and High Abuse Multifamily Properties via Multifamily Insiders Blogs

Estimating expenses is always topical around tax time, when deductions are on everyone’s mind. More broadly, both appraisers and investors find themselves with recurring questions in estimating what to include on the expense side in order to achieve the best possible projections for multifamily property valuations and operations. Below are some basic rules of thumb to keep in mind when estimating reserves and replacements or underwriting potentially high abuse properties. For the latter, due diligence discovery such as careful study of rent rolls and financials would help determine whether or not a given property should be considered ‘high abuse’.

Reserves for Replacements
This category provides for the periodic replacement of short-lived items such as carpeting, window coverings, roof covering, water heaters and appliances. The annual figures are calculated by dividing the replacement cost of an item by its useful life.There are differences in opinion as to whether reserves should be included for newer buildings. For a new building include only those reserve items which will probably be replaced in the first seven years. This is most often limited to carpets, window coverings and garbage disposals. Do not take a reserve for the roof (the roof’s condition is still considered in the final value estimate, however), but some lenders require it. Include a reserve for the water heaters, especially if the water heaters are individual water heaters.

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