This is kinda playing with my head. I have existing rental income (say average is $1,100 per month). I want to model that 10% of these go to $1,300 in 1 year. Assuming 50 units, would it be something like this?
where X = turnover rate of 10%
= [1,100 * (1-X) + $1,300 * (X) ] x 50 units (Year 1)
= [New Average * (1-X) + $1,300 * (X)] x 50 units (Year 2)
and so on...
would this be correct? Is there a simpler way to do this? This kind of seems not right
I would just model 5 units at $1,300. Turnover happens at the unit level.
I understand that, but how would you choose which units to turnover? I have some units at $750 and some at $1,200, hence why I went the average rent route
I can do it the complicated way, but the easiest way is to model the rents, then have a line item below all your income for turnover, like a vacancy calculation. Just get your total gross rent per period and then multiply that by 10% per period.
The complicated way sometimes helps, and its pretty simple.... You look at the rent roll, figure out how many leases end in which month and have 10% of them leaving.
This is helpful especially on value add deals. Soo many times I see deals where people claim they are going to renovate 12 units a month or like 5% of the property, but you can look at the rent roll and there isn't enough turnover. Not a deal breaker on a deal, but like cmon your projection is literally impossible.
Thank you!
Dude, this can get really complicated(nested ifs), depending on the hold period. The way you described it might work for one cycle of rents for release-up.
Yeah, I mainly do it in Yr.1, Just because when I was an LP the partners who modeled Yr 1 like this actually hit year 1 proforma rents or could explain concisely why they missed. I get it, if you want to make assumptions on Yr 2-Exit whatever.
But in year one if you miss, it is really easy to explain if you modeled it this way and how to adjust budget going forward. When it is all averages in Yr 1, it just makes a miss harder to explain.
Don't get me wrong, I don't throw a deal out if they model using averages. I just think its interesting to read an underwriting, plug it into my model and see that what they are saying they will get in rent in Yr 1 is impossible because of the in place leases. Like you have signed documents stating the rent & end date why are we making assumptions here.
Is it redundant - Maybe, but you don't see other asset classes making up numbers when they have a lease signed.
Thanks this makes sense and I think it'll look nice as well on the proforma (easy to understand)
You could also just figure out what the overall rent growth would be if 10% of units increased $200 each year and plug that in as your top line rent growth assumption and get basically the same result. Its oftentimes not worth killing yourself with overly detailed modeling when a simple answer can get the same result (especially if rounding the resulting value of your DCF to the nearest $100k or whatever) and when reality never ends up matching the model anyway.
Yes, OP should do this.
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