Real Estate Underwriting Case Study
Recently I was given a acquisition case study as part of a project for an internship with the following information provided:
- 100 Unit class C multifamily being converted into class B
- Market rents ~1600-1800 (Columbia Heights DC)
- Renovation costs: 25K per unit
- 5 year hold period
- 6.5% going in cap rate
- 1 year renovation period, 1 year absorption period
Model should include IRR, leverage, and return on cost.
That is all it is, no op-ex, no NOI, no debt assumptions.
Anything I am missing here? Units are renting 21,600 max - 25k renovation cost gives a negative NOI. Not sure how to find the purchase price. If anyone has any ideas would be appreciated.
Hey iml224, the following topics might be helpful:
More suggestions...
Hope that helps.
Negative cash flow in the first year isn't the end of the world in a project like this, your NOI on the frontend will take a beating due to the renovation cost but should be made up for on the backend due to the improved rents. 21,600 is the max top line rent for a single year - you're holding the asset for 5 years and the units should be improved and occupied for at least 3 of those years. 3*21,600 much greater than 25k though this is a very simplified way of looking at it. I would also ask what the renovation schedule should look like. The total project might take 1 year but I doubt each unit takes that long, so would try a more sophisticated renovation timeline on a monthly basis. You don't want to model Unit 1A finishing its renovation in Month 3 and not producing income till Month 25 because your perfect model says it should take a year to renovate, a year to absorb.
Also - you might be nervous as the intern to ask your coworkers these questions. Ask them. The 30 seconds it takes to ask and receive an answer is much faster than the three days you've had on this posting without anyone helping you out. Trust me, everyone's been there. Regardless, I'm working through this right now if you want to send me yours and I'm happy to give feedback.
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Use the cap rate to a in-place noi based on a general expense ratio assumption to find purchase price
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