This walkthrough, our sixth in the series, takes you through the entire process of underwriting an apartment acquisition opportunity using the All-in-One Model’s new multifamily module. I’ve created hypothetical assumptions for this exercise written out in PDF format (download link below) and then use those assumptions to assess an appropriate purchase price for this opportunity.

In an effort to provide greater instruction on how to use our All-in-One Underwriting Tool for Real Estate Development and Acquisition, we’re developing a series of walkthrough videos and posts on the methodology behind the various components of the model. Our hope is that if you are empowered with the how, you’ll be more willing/able to provide feedback to improve the model.

If you haven’t already, you can download the model here. This walkthrough uses beta version 0.4.1 of the All-in-One Model.

Video Walkthrough – Underwriting an Apartment Acquisition


Assumptions – Hypothetical Apartment Acquisition

You can download these assumptions in PDF format here.

Investment Summary

  • Investment name: Saddle Ranch Estates
  • Parking: 319 spaces
  • Year built: 2005
  • Analysis Start: Jan 1, 2018
  • Construction length: 0 months
  • Analysis Period: 10 years
  • Apartment Units: 248

Valuation

  • Market NOI cap rate for comparable properties: 4.75%
  • Forecast growth in cap rate: 5 bps per year
  • Exit cap rate: 5.25%
  • Target unlevered IRR: 7.00%
  • Selling costs @ reversion: 2.0%

Permanent Debt Assumptions

Senior Debt

  • Amount: 65% of acquisition cost
  • Loan Fees: 0.5% of loan amount
  • Interest rate: 4.25%
  • Amortization: 30 years
  • Interest-only: None

Junior Debt

  • None

Partnership Assumptions

  • Equity split: 95/5 LP/GP
  • Preferred return: 6.0% paid pro rata
  • Promote: 80/20 to a 10% IRR, 70/30 to a 15% IRR, 60/40 thereafter

Operating History

Operating Assumptions

Unit Mix

Other Income

  • Utility Reimbursement: $45/unit/mo
  • Parking Income: $0
  • Storage Income: 110 storage units @ $45/storage unit/month with 10% vacancy
  • Other Income: 2.50% of Total Rental Revenue

General Vacancy

  • 3.5%

Operating Expenses

  • 2017 actuals grown by 2%
  • Mgmt fee @ 3%
  • % Fixed – All at 100%
  • Expenses grown at 2%

Capital Expenditures

  • Other CapEx: Capital Improvement Plan – $800,000 in year one, $800,000 in year two
  • Capital Reserve: $250 per unit

About the Author: Born and raised in the Northwest United States, Spencer Burton has over 15 years of real estate investment and development experience. In his current position, Spencer assesses new acquisition, development, and debt opportunities for a $45bn real estate fund. He resides in Dallas, TX.