Hypothetical investment question

multiman445's picture
Rank: Monkey | 58

Consider the following:

I purchase a stabilized multifamily asset at a 6 cap, hold it for 5 years with 3% annual I&E growth, and sell it at 6.25 cap. This gets me to a 7.00% unlevered return and a 13.27% levered return assuming 75% LTV and 4.25% Interest rate. I am including closing costs on acquisition and reversion.

This hypothetical scenario seems too good to be true. Assuming this hypothetical asset could indeed be acquired at a 6% and all market participants are rational, the only explanations to me are that other market participants would be assuming lower rent growth, more cap rate expansion, or very different debt assumptions. Am I crazy?

Comments (13)

Nov 27, 2019

3% annual rent growth for 5 years is a lot.

    • 1
Nov 27, 2019

Agreed. 2020 projections are looking like a 20 bps trim to 2.4% for long term rent growth in the MF space.

Nov 27, 2019
bd.charlus:

3% annual rent growth for 5 years is a lot.

For an acquisition, yes. If it was development though, 3% can be no big deal depending on the market/submarket

Nov 27, 2019

when you say this, do you mean a newly delivered building is going to have a better ability to increase rent as opposed to the acquistion of an existing and presumablyy older one?

Nov 27, 2019

???

Nov 27, 2019

We model 2.5% annual rent growth for new ground up MF developments.

Also consider if your CapEx projections are realistic. To stay competitive...an aging asset will require an investment in improvements beyond just a simple 3% annual increase in CapEx expenditures.

Nov 27, 2019
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