Best way to model rents on a 38 unit value-add deal
I'm a relatively new analyst and curious to gain some insight from others who have worked on deals like this.
My team is looking at a 38 unit deal that we plan on renovating as the leases expire and then capturing the rent bump once they're re-leased. Typically, I would model the renovations and lease up by making an assumption as to the average number of units I expect us to renovate and turn every month.
However, with this deal being much smaller than normal, I feel like my regular approach is not well suited for this deal because lease expirations are very sporadic and not evenly distributed (i.e. one month has 1 expiration and another month has 6). With only 38 units, the timing of rent will have a bigger impact on property performance than it would on a 200 unit deal.
I'm guessing that the best way to do this is to model the rents unit-by-unit based on the rent roll. To better explain what I talking about, here's a quick example:
Unit 1 --> i) pays in place/contractual rents until expiration on 11/31/2024; ii) have 3 months of no rent to account for renovation & lease up downtime; iii) a new lease begins on 3/1/2025 and pays the new renovated rent premium.
Unit 2-38 --> continue modeling each unit like I did above until all units are renovated and leased up.
If I should model rent out unit-by-unit, then would I not need to include a loss to lease, since I'm not using market rent?
Please let me know your thought and if you've developed any best practices for deals this size? Any suggestions are greatly appreciated.
I don't want to over complicate it but I also want it to be realistic.
Thanks in advance for any help!
Based on previous WSO threads, here are some insights and best practices for modeling rents on a 38-unit value-add deal:
Key Considerations:
Unit-by-Unit Modeling:
Example Breakdown:
Loss to Lease:
Best Practices:
Detailed Rent Roll Analysis:
Renovation and Lease-Up Assumptions:
Staggered Renovations:
Sensitivity Analysis:
Example Model Structure:
Unit 1:
Unit 2:
Continue this structure for all 38 units.
Conclusion:
Modeling rents on a unit-by-unit basis for a 38-unit value-add deal is a sound approach, especially given the sporadic lease expirations. This method provides a detailed and realistic projection of property performance, accounting for the specific timing of renovations and lease-ups. By following the best practices outlined above, you can create a robust model that accurately reflects the dynamics of your value-add strategy.
Sources: Modeling ground lease payments into a pro forma, General Vacancy Deductions, Multifamily Rent Per Square Foot vs. Rent Per Unit, Lender/Debt Fund Modeling vs Broker Modeling, What is PROPER underwriting process like for development projects
You should model it unit by unit for your analysis. The loss to lease isn’t a factor in my mind. You need to support your analysis with rent comps. Find several nearby properties with renovation levels that are very similar to the scope you’ll be renovating to. The properties should have been built in a similar time period as your property as well. Then, look at their floor plans to determine which ones are most similar to your units. After analyzing the above for the whole comp set, you should have a good idea of the rents you can achieve when you lease each unit.
Thank you! That's super helpful.
One more question: How would I go about accounting for vacancy/downtime when some of the earliest units to turn have been renovate and collecting the renovated premium rents, while some of units with later expirations are still only getting their original in-place rents? If I applied a 5% vacancy to gross rent, that would dock the rents of the in-place units even though they're occupied. Hope that question makes sense.
What you do is have 3 rows at the op of excel, month, year and date. You also have a rent roll tab, that would roll up to revenue and expenses tab. On the rent roll tab you have the LXP of every unit in a column going down. Across these tabs, you have a formula that after LXP then new starting rent. You add in a lease start date with is LXP + downtime.
On the roll-up tab where it is just gross rents then you apply the 5% vacancy.
Let me know if this makes sense.
"Out of intense complexities, intense simplicities emerge." - Winston Churchill.
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