Consider the following:
I purchase a stabilized multifamily asset at a 6 cap, hold it for 5 years with 3% annual I&E growth, and sell it at 6.25 cap. This gets me to a 7.00% unlevered return and a 13.27% levered return assuming 75% LTV and 4.25% Interest rate. I am including closing costs on acquisition and reversion.
This hypothetical scenario seems too good to be true. Assuming this hypothetical asset could indeed be acquired at a 6% and all market participants are rational, the only explanations to me are that other market participants would be assuming lower rent growth, more cap rate expansion, or very different debt assumptions. Am I crazy?
3% annual rent growth for 5 years is a lot.
Agreed. 2020 projections are looking like a 20 bps trim to 2.4% for long term rent growth in the MF space.
For an acquisition, yes. If it was development though, 3% can be no big deal depending on the market/submarket
when you say this, do you mean a newly delivered building is going to have a better ability to increase rent as opposed to the acquistion of an existing and presumablyy older one?
???
3% rent growth in a new development in an emerging or strong submarket isn't a lot or overly aggressive.
so why would it be for an acquisition
The key is which submarket you are in. If the submarket is already stabilized, it’s harder to see that type of growth. However, if you are in an up and coming submarket, 3% is not crazy. I’d check with market reports or CoStar to see what rents have been growing at historically, and make your own projections.
Presumably the property has already increased rents aggressively through the lease-up if managed correctly, and if the submarket in question is anything like booming submarkets here, there are probably 2-3 additional starts that a buyer would have to contend with throughout the first two years of their ownership alone. Also, acquisitions guys, in my experience, underwrite more conservatively.
Loads of assumptions there, but I'll admit to being flippant with my "for an acquisition, yes" response. That too is submarket dependent.
We model 2.5% annual rent growth for new ground up MF developments.
Also consider if your CapEx projections are realistic. To stay competitive...an aging asset will require an investment in improvements beyond just a simple 3% annual increase in CapEx expenditures.
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