Underwriting Rent Increases on Large Multifamily

[Barry Sanders]

When it comes to building your own models how do you underwrite value add rent increases ie: bringing rents up to market at lease renewal/ bringing down units online

It can be done manually when investing on a small scale but once you get into bigger unit counts it seems inefficient to manually enter the rent roll for each month during reposition and even more complex when there is a diverse unit mix

How you do you model this on your large deals with the goal of accuracy and being conservative? do you use average rent of the occupied units, average rent of all units including vacants, manually enter rent roll monthly

[Brian Burke]

The first step is to determine what post-renovated rents you can achieve.  This is very similar to the way you would price the sale of a single-family home:  look at the comps.

You want to find properties close to the subject, of similar size and vintage and with similar units.  Visit each of the properties and tour them as if you were a prospective tenant so you can get a feel for the property's amenities and the finish level of the unit interiors.  Find 4 to 6 comps that fit the criteria and you'll start to get a feel for what market rents are in the immediate area.  If you are looking to renovate, make sure that the comps you are using are also renovated to a similar level as what you plan to do.

I do a side-by-side comparison of every floor plan at the subject property to each of the comps, comparing beds/baths and square footage of the units and form an opinion of potential rents on every floor plan.

Next, I add up all of the rents for the year for all floor plans, and then subtract the current total rents for all floor plans.  This number is the "loss to lease".  I assume that it will take three years to get to all of the units and bring them up to market.  So in the first year I project that the loss to lease will remain as it is currently.  In the second year I cut the loss to lease by around a third.  In the third year I cut the remaining loss to lease by around half and by the fourth year I level it off around 2%.  Depending on the specific plan, these numbers can slide a bit in one direction or the other.