Loss-to-lease modeling for multifamily acquisition
Does anyone have any good tips for modeling loss-to-lease on a multifamily acquisition? I'm looking at a value-add project and am struggling to find the best way to model it. Any tips or resources would be appreciated.
I have one a borrower sent me previously. I'd have to find it, but it basically involves entering the entire RR then a separate chart for "market rents", which you then make assumptions about when each units rolls to market based on the lease expiration dates.
If you're renovating units on the turn, you have to make assumptions about reno/down time and then roll each unit to market after renovations.
I have one rent roll which is current, in-place rents with the other rent roll for market rent. Then I do a mark to market period (12 months for example) in which the in-place units turn to market. the combination of some units that are in-place rents and units that are turned to market is the top line rental income. Breaking into CRE' proforma master class taught me a clean way how to do this. Would recommend it using a udemy discount.
Is it a requirement that you include loss-to-lease in your pro forma? If not, why not just model off of in-place rents -- essentially, blow out Gross Market Rent and Loss to Lease and start at Current Potential Income?
Not a requirement per se really, just a slightly more accurate way to estimate the cash flows month-by-month, year-by-year etc.
Definitely more helpful when renovating units building by building in a large complex though.
Got it.
Just curious, if you know your renovated rent (or can back into it based on an assumed premium) then why not make an assumption for ur start date when the reno rent kicks in 3-6 months post-reno? Otherwise, aren't you effectively guessing a % Loss to Lease?
Either scenario is a guess, it just sounds to me that the latter involves more work unless you're confident in ur % LTL?
In the long term, LTL should burn down to about half of your top line rent growth, e.g. if your stabilized rent growth is 3% then LTL should be 1.5%. This is because, assuming you’re signing 12-month leases, the rent roll will have some leases that were just signed and some leases that are almost 12 months old, so on average, in-place rent lags market rent by about 6 months.
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