Point on underwriting multi acquistions
Curious whether people typically model out each individual unit, or $/SF then apply to residential SF?
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Based on the most helpful WSO content, when underwriting multifamily acquisitions, the approach can vary depending on the level of detail and the specific goals of the analysis. Some key points include:
Modeling Individual Units: This approach is more detailed and involves analyzing each unit's rent, size, and other characteristics. It allows for a granular understanding of the property's performance, especially when there is a diverse unit mix or significant variation in unit types.
Using $/SF: This is a more streamlined method where rents are analyzed on a per-square-foot basis and then applied to the total residential square footage. While less detailed, it can be effective for quick comparisons or when the unit mix is relatively uniform.
Combination of Both: In some cases, a hybrid approach is used. For example, $/SF might be applied for initial evaluations, and individual unit modeling is done for deeper due diligence or when presenting a case for acquisition.
Ultimately, the choice depends on the sophistication of the model, the available data, and the specific requirements of the underwriting process.
Sources: Multifamily Rent Per Square Foot vs. Rent Per Unit, HOW DO YOU DETERMINE YOUR UNIT MIX?, Value add - multifamily ... RENTS, TAXES, WTF??, Q&A: Home Run Deal/Project - ~$3mm Profit, ~6.42x EM, ~18 Month Investment Horizon, "Pre-Stabilized" Investments - Multifamily
Use chunk rents when underwriting.
What do you mean by this and can you explain? I’ve heard this before but admit I don’t fully understand
probably 1 br = xa , 2 br = xb, 3 br = xc (som1 correkt me if wrong)
chunk rent is just the conventional total monthly rent e.g. $2,000 / month ($2.00/sf on 1,000sf)
wtf is a chunk rent lol
You're an associate and never heard anyone talk about chunk rent? It's just jargon for the monthly rent, but it's can be a useful took. While industry professionals obsess over psf metrics, the general public only really cares about what they're paying per month (to an extent), they're not going around thinking one unit is 15 cents more psf than another, they're saying "this is a nice unit that can fit my furniture and is in my budget". It can be a useful gut check because sometimes psf values are distorted by weirdly shaped units or comps that just built larger/smaller than you, but if you line up on chunk rents you can still feel comfortable with your assumptions.
It depends on how granular you need to get. Definitely not $/SF like it’s an office building though.
It can look like this:
300 2BR units at $3,000/month
Or this:
Or some other similar method.
Thanks. How do you model the unique turnover timing for each unit? To do that individually could take a long time depending on how many units the asset has.
Someone who buys these things instead of building them probably has a more specific answer, but there’s a market renewal percentage/assumption, a market absorption number/assumption, and monthly termination dates.
So in July you’d have say 50 leases terminate. You offer them a current-market % rent increase. You assume something like half of them take it. Could be more, could be less, depending on how shit the building is, how well the market is doing, and what kind of rent bump you propose. For the non-renewals, you put them against your market absorption and that shows how long it’ll take to lease them back to. Then same thing for August, September, etc.
Even if you do them individually, it’s not that many units for a single property. Property management has all of the data too. But for underwriting you can just make general assumptions. You’ll know going in if your initial strategy is retaining existing tenants or boosting rents.
i would recommend using a blended assumption in the cash flow contrary to other comments. your inputs tab would still show a table of each unit type, amount, sf, $/SF and chunk rent. the cash flow would pick up the total blended amount.
100 units, 1,000 avg sf / unit = 100,000 rsf
blended $/sf across all units is $3.00 / SF
turnover is 10 units / month = 10,000 SF * avg rent in month = turnover vacancy
using chunk rent as opposed to $/SF is not ideal because $/SF is a better metric to evaluate the average market rent regardless of unit sizing (not a factor in chunk).
Thanks. This method amortizes (i.e. there is consistent/nominal monthly figure) vacancy correct?
Since you specify that this is for acquisitions and not new construction, my advice would be that you should use a $/sf and an overall vacancy/bad debt allowance when doing a first pass or a gut check on whether the acquisition makes sense, and then absolutely model it out on an individual unit basis when you get into a more detailed underwriting.
You'll understand far more about your tenant base and potential pitfalls with collections and leasing if you actually build in every unit's cash flow. Are the A line units very delinquent on rent? Maybe they're withholding because the pipes leak in that line. Is the bad debt or vacancy being driven by a handful of chronically unleased or late paying units? Having a single unit that sits empty for 12 consecutive months tells you a very different story about leasing conditions than 12 units that are vacant for 1 month each, but both of those are indistinguishable when looking at raw vacancy data.
Any time you have real world data to work with, you should be doing so. New construction is obviously a different animal, since it's all guesswork anyway
Thanks. Mechanically, how do you go about modelling each unit? Projecting revenue individually is straightforward but may be a lot of work, but what method do you use for vacancy/unit turn/resi agent fee?
I work in a rent controlled market, but we usually use a projected turn probability based on tenant tenure, with those probabilities segmented into buckets of years of tenure. We project market rents for each unit individually based on location, square footage, BR / BA count, floor, view, etc. We also UW renovation capex & projected downtime based on the building, tenant tenure, our best knowledge of condition, etc. Agent fees are standard based on contracts we have with our leasing agents.
I built our asset management model which we use after closing on a MF deal and one key feature is the ability to model contractual rent by unit by month for up to 5 lease generations.
To answer your question Re: mechanically, how do you model...
Ex: If a unit has two lease generations where #1 begins/ends 12/1/2025 to 11/30/2026 at $5,000/mo and #2 begins/ends 12/1/2026 to11/30/2027 at $6,000/mo.
To model the vacancy I'll populate new lease terms by assuming 2 months of turnover vacancy then key in the new start/end dates and rents.
The two months of absorption & turnover will be baked into this line item on the pro forma.
After modeling the full rent roll I'll flip over to the pro forma and make an assumption for general vacancy using this logic: if the actual absorption & turnover vacancy is below 10% then assume 10% general vacancy loss, if it's above 10% then use the higher value.
I think you are overcomplicating it. Based on all comments, I am assuming you are talking about underwriting apartment buildings.
Units are broken down by unique floor plans and all bunched together, as some else noted.
You are not modeling rollover, because you have uniform leases of 12 months with no renewal options. Your rollover is averaged within your vacancy rate.
Even if you are doing value-add plan with renovations across the portfolio, it is modeled in as "percentages" that will impact cash flow each month over the overall renovation timeline. I.e. if you say your business plan will take 20 months, the model will pull 5% of gross rent off the top for your down units, each month. If your renovation timeline per unit is outlined as 1 month, you will start rolling in 5% (on top of general vacancy) off the top in month one, then month 2 you will pull 5% off of your in-place rents, while adding back 5% of your post-renovation rents.
The model is not looking at unit 1120 is offline at $1200/mo for one month, then back on at $1500/mo next month. It is just taking the overall gross rent, and applying the applicable percentage.
This is not commercial. Your leases are uniform, your vacancy is often set at market levels, and, as noted, you often have hundreds of identical units. So if the tenant in 1120 renews, but 1220 vacates, or vice versa, it doesn't matter.
have never modeled out individual units, just use gross/aggregate amounts
looking at the rent roll and past performance will give you clues on what the proforma bad debt, vacancy, turnover etc should look like, then apply these as % losses on the total annual gross potential rent
ETA: the more multifamily acquisitions i've done, the less granular I get in acquisition modeling. Just use the model with conservative assumptions as a gut check if you'd still buy it. The actual performance never matches the acquisition pro forma regardless of how many tabs and fancy formulas are used.
And you just uncovered the real secret of underwriting... once you are in an industry long enough, the underwriting is purely performative. As you note, at best it is a gut check, but everywhere an "assumption" has to be placed, you will have already rationalized that number before it get plugged in.
Underwriting, often like appraisals, are effectively just a deliverable to the IC or investors more than anything practical use. At least once you have focused on a specific market/business plan for more than a few years.
Pretty sure you just model out units by either mix or renovated/market rate vs non renovated. The units that are renovated when they turn drive capex and for that period and move mix towards renovated units. Modeling is for you. So make it work for you.
Take their T12 at face value and just grow it at 3% per year. Assume cap rate compression at the end of the hold and you're solid. works every time.
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