Value add multifamily / Post renovation refinance.

[Armando Payano]

Need your help BP,

Analyzing the potential refinancing results of a value add multifamily property. 

Purchase price $1,000,000

Units: 20

Average market cap rate 6%

The apartments appraised at $1,050,00 using an income approach. 

At purchase:

Average rent per unit $625

Gross rent $125,000

Expenses 50%

NOI $62,500

Post renovation:

Average rent per unit $800

Gross rent $192,000

Expenses 50%

NOI $96,000

Model 1:

Income increase per door $175.

$175/month x 20/units = $3500 x 12 months = $42,000 annual. 

$42,000 (annual income increase) / 6% (average cap rate) = $700,000 value added.

Model 2:

Income increase per door $175.

NOI at purchase $62,500

NOI after renovation $96,000

$96,000 - $62,500 = $33,500

$33,500 (annual income increase) / 6% (average cap rate) = $558,333 value added.

Purchase price $1,000,000.

Downpayment $548,000.00

At the refinance do I walk away the value add amount? 

Or is the loan restructured based on the new value. 

Ex: Model 1. 

New value $1,700,000 x downpayment 30% = $510,00 Net to me based on my downpayment $38,000.

Are these calculations correct? 

Are they in the ball park of what can be expected after refinancing? 

What formula is best for trying to gauge your ROI of the amount you invest to improve a property.

We are spending an average $4000 per unit, they are all 1 bedroom apartments and this includes labor and materials. We have remodeled 35% of the units and have 2 more underway now. We also painted the exterior and redid the landscaping. 

Thanks in advance. 

[Stephen Swiatek]

Armando,

Looked through the numbers of what you gave and see the following:

You purchased at roughly a 83% occupancy or 17% vacancy and are looking to take the property to 100% occupancy (though 100% can be done, at least a 5% vacancy factor should be used). So what I see you doing in your value add is increasing occupancy and rent per door through renovations.

With this said, after renovations are done I see a annual gross rent of $182,400 = $800/unit x 20 units x 12mo x .95 occupancy. $182,400 x 50% expense ratio as you had it = $91,200 NOI / 6% CAP = $1,520,000 valuation ($520k in value added) x 75% LTV refi (could be higher or lower) = $1,140,000 new loan amount. At the refi, to answer your question, you would walk away with $1,140,000 - payoff of current loan ($452k?) - closing costs.

If I'm reading it correctly you have a current loan amount of $452k and put down $548k while looking to put roughly $80k in renovations. If this is right, you would have $628k into the deal. So you would recoup your $628k and have just a small amount left over after closing costs are factored in.

FYI...There is a bit of a flaw in your $42k/yr annual income increase as the 50% expense ratio hasn't been applied to it. Model 2 is a more accurate representation of the value added...though I would add in the 5% vacancy instead of being at 0%.

Annual rate of return, based on amount put into deal/NOI, is a good calculation for returns up to the point of refinance and then it goes out the window...IRR would be your best formula after refi.

Hope this helps!

Stephen