Do you model an acquisition on a monthly or annual basis?
If you’re making a 7-10 year model for a MF acquisition, is it more common to do it on a monthly basis (then roll it up into an annual CF), or just go straight to annual?
If the answer is monthly, how are you growing your rents and expenses (i.e. growing the line item every month or just once a year in the first month of each year)? I’m sure your taxes and insurance would only grow once a year but what about you rents, R&M, and reserves?
I saw a similar post but it was specifically referring to a development. Appreciate the help!
I’m in value add and we use monthly and then rolled into annual. When we are renovating units on the turn we need to be a bit more granular with timing of the in-place lease expirations and construction/leasing downtime.
You could probably get away with an annual model if you’re doing a long term hold and buying a stabilized asset. But I’m curious to see what others have to say.
Makes sense for renovations, but in reality you aren't getting monthly bumps the rent increases are annual outside of when updated units would start at a certain month.
Read something on Linkedin that talked about an investor with 3k+ units and how he didn't even know what a cap rate was, obviously you want to look at metrics but always so funny to me how complex people are making their analysis like it's right and will matter. If you are worried about monthly vs. annual model thinking that will drastically affect anything it's too much. Just underwrite conservative basis, rent growth and accurately account for things, many people did very well in the 1960s-90 with a basic approach meanwhile you have people from ivy's wanting to analyze everything/add all these layers just to make things work.
May as well take it a step further and just say do all your math BOE. I can bang out a basic annual levered cash flow in 5 mins. Why even hire analysts?
Thanks. What about monthly vs. annual expense growth? For things such as utilities and R&M, are you compounding on a monthly or annual basis?
Breaking into CRE taught us to grow expenses like utilities on a monthly, while taxes and insurance should be on an annual basis since those are reassessed annually. I'm curious what the industry standard is.
Totally agree about the models being too complicated. Should be simple. However regarding monthly vs annual - it may have a different amount of equity. First 6 months of the year could be negative $500,000 and the next 6 months could be $1,000,000 in positive cash flow. This would show as positive $500,000 in cash flow. If just viewing annual, you wouldn’t know you would need an additional $500,000 of equity.
Monthly. Roll into annual
always this on longer holds
on a 10 year hold - you get a minimal IRR boost by doing monthly cash flows. It's usually a waste of time on core+/light value add deals IMO, but incredibly important if there is any true development period where cash flows are lumpy.
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