Underwriting Multifamily Value Add and Development Deals
So I currently work at a student housing developer and am starting to develop a good understanding of what the key metrics are when looking at new markets for development. However, I have been wondering what the key metrics and underwriting criteria are for multifamily market rate and luxury value add and development deals. I'm not looking to get pigeon holed into just student housing, and I want to eventually do my own value add and development deals across all the residential niches; condos, senior, student, and market rate value add. However I think starting off in market rate value add would be the more logical entry way into doing something on my own and I have been looking at some market rate deals for a value add play and am wondering if anyone out there is currently working for a company making these investments or doing it themselves.What are the key deal makers and breakers when looking at these deals. Also If I wanted to eventually transition to a pure multifamily developer or valued add firm are their any tips you guys have on a learning perspective to develop.
Your comps (similar vintage, quality, location) will determine rate typically and you're essentially competing with those buildings for tenants. For value add, you'll want to be in a growing area or area where demand is there as evidenced by high occupancy rate/low vacancy. Understand your submarkets and what is typical for them (both in terms of rate and occupancy and unit mix). Some markets favor single people or couples at most a la 1BRs while others are more family friendly and 2BR/3BR are more common. Put yourself in a renters shoes...when evaluating a property, figure out why you would want to live there. Is it location? Is it priced better relative to other properties? Are the units larger? Are houses incredibly expensive? Rent to own spread is important particularly for the luxury market. Calculate a monthly mortgage on 20% down relative to the rent per month in the area--you'll want 100% spread ideally if you're building luxury product.
Value add in general seeks to accretively improve the property by increasing NOI while spending as little cash as possible to do so. If you're going in cap is a 5%, you'll want to improve your NOI by $5 for every $100 you spend in capital improvements minimum or else you're not utilizing your capital effectively.
There are many books on apartment investing and I would recommend picking a few up. This topic deserves a book's worth of writing so I'll let you get to it.
Any books (on apartment investing) in particular that you would recommend?
Great write-up cpgame . Would mind explaining the thought process behind the 100% spread number used in the Rent vs Own analysis? Is it stating Luxury Rent is 100% greater than owning a house with a similar finish? Is it the opposite?
Sure, If you're in a part of town where it costs less or about the same to pay a mortgage each month vs. rent, you're less insulated from the homeownership. Ideally, you want to be in an area where housing prices are so high (and the mortgage payment each month on said home) that you price people out of the ownership equation. This is why it costs much to rent in NYC. In reality, it is still a significant discount to owning (assuming one can even make the downpayment).
Could you break down and explain a bit further 5:100 ratio you're referencing. I get it, but it would be valuable to get some color on what you mean.
5:1 was general example, point being if you’re not increasing the yield you bought it at (your going in cap) via accretive capital improvements that improve NOI a rate that is greater for every dollar spent than that which your going in cap would dictate, you’re actually doing a disservice by injecting any additional capital into the asset. In other words, spending money on stuff that won’t raise NOI is a great example; it’s key to find the biggest bang for be smallest buck.
I transitioned from student housing development to multifamily value-add acquisitions. Feel free to message me if you have any specific questions. Overall, the transition was very easy.
What would be the main differences you've observed regarding market analysis, and the rent increases you're able to realize post-value add. Also, any financing or positioning strategies you've seen you can execute on a MF play compared to a SH play, or vice versa?
Also, how do investors view differences in the exit, if at all. I know there are specific points investors hit on regarding liquidity, anything you've noticed SH guys look for compared to MF groups?
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Interesting you were a SH developer... any insight you could provide on how SH groups assess markets? Like deeper than just enrollment growth and supply; are there any specific tools you've developed, or are there considerations you would have that may not be obvious?
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