Does anyone know of any models out there that allow you to drop in the existing rent roll and model out retention (%s). I know REFM has a multi-family acquisition model, but doesn't allow the user to model retention probabilities and AE would be tedious to enter all tenants (350 units).
Would appreciate any thoughts at all. Have a pretty extensive library of models and would trade
I haven't seen a multifamily model that has this functionality. From what I've seen, rents are typically forecasted on a unit-type basis (Studio, 1BR, 2BR, etc.) with inputs for vacancy etc. rather than a probability that unit #310 will renew vs. the probability that unit #311 will.
Just to be clear. The probability of renewal is blanketed across the property based off a market number. The biggest thing we're monitoring is the probability of renewal against when the lease expires.
For example:
If we have 20 units set to expire in June and our average retention rate has been 60% then we'll budget our renovation allowance accordingly. The main purpose of it is for cash management while we are in the process of rehabbing units.
Retention % is not used in mutli-family. You should just use a vacancy rate and, if it's a value add deal, # of units being turned each month, year, etc... If your boss wants you to model out retention rates on a per-unit basis for a 300+ unit deal then your boss hates you.
Agree and confirm with what everyone has said before me.
I actually disagree with this. We model turnover %s/renewals in Year 1 so that we can accurately phase in a mark to market and/or a renovation income. This module in our model is monthly and feeds into our Year 1 GPR and Years 1-3 renovation income line items. Something like this is likely false precision for most groups, but as a large national operator this module feeds into our budget model.
Maybe this works in Class A because the tenancy is more trustworthy. I don't play in the Class A space but regardless it seems like an ass-backwards way of doing it. You're just plugging in a % chance of renewal based on the market factors and then determining how many turns there will be each year? Why not just skip the hassle and take the same % and just plug in the number of those units you plan on turning in the first year and go from there? Unless you're getting 350 tenant estoppels and simultaneously asking them if they plan on renewing...
When you say retention probability, do you mean probability of a given retention rate (%) using the rent roll as your data set? Or the % probability that a given apartment in your rent roll will renew? If the former, then this is more complex than the solutions being suggested.
It's the % probability that the apartment will renew. Sorry if that wasn't clear.
In that case, what was said above was pretty spot on, best just to aggregate for the portfolio as a whole based on historical or market rates (broken up by unit type maybe). But retention should just be the inverse of vacancy rate, so I don't see the issues there. It shouldn't be too hard to build one on your own that can do this on a monthly basis, and incorporate lag time and re-delivery for turnover. It might take some time but it's worth it to make sure it caters specifically to your model and will save a lot of time in the future. I recommend setting it up so that you can input unique annual values for retention and turnover time so that you can run a variety of stress tests (eg. what happens if there's another 2008 and we see a decrease in retention and extended turnover period for a couple years?).
You may want have a separate model with different assumptions for units that have been renovated as these may attract a different rental demographic and may have a different retention rate.
As a general rule with multifamily, I like to go by the law of averages. With so many short term leases, people break leases, go month to month, etc, It's no use getting too specific with variables that are uncertain.
Yeah this really boils down to false precision. But, I think it's worth having these types of assumptions in a model. Have always seen it done this way, and it's always funny how the people who like to do simple underwriting get irritated at these types of assumptions. I get why they do because nobody can predict the future, but these are real assumptions we need to think about. Nobody is going to talk about rollover % on a unit by unit basis, but they should be thinking about it on a floorplan basis, especially if they are doing ground up or renovations. Doing this helps track loss to lease, unit turnover costs, extended downtime and potential concessions, and obviously gives you more accurate cash flows earlier in your projection (basically what a lot of you said above). In theory, you could just increase your vacancy rate to account for this but in my mind that's equivalent to saying...well, I'm doing a valuation on this office property and the main tenant is leaving...so I'm just going to leave them in there and increase general vacancy by 10% and increase the discount rate. You get to a close value/IRR or whatever you're solving for, but your cash flows are wrong.
Anyways, here's a model that shows how rollover % is used. It's the acquisition model
www dot adventuresincre dot com/category/re-modeling/excel-models/apartment/
Agree with this. Another consideration is where your capital comes from. Many HNW guys are sensitive to year 1 cash on cash while more institutional capital tends to pay more attention to equity multiples and IRR.
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