Modeling Multifamily real estate

What is multifamily real estate?

Multifamily real estate or apartments are defined as buildings containing 5 or more rental units. Multifamily units represent approx 25% of the total US RE market. Multifamily is the most familiar with investors as it is generally viewed as the least risky RE investment.

Garden style multti-family

Properties are found in more suburban locations and are typically 2-4 stories tall

Mid high rise style multi-family

Properties are found in more urban locations and are typically 5+ stories tall.

Within asset categories, properties can be graded based on asset quality, ranging from

Assets range from class A to C

• Class A: assets are typically high amenitized, newer buildings in better locations

• Class C: assets are typically the oldest buildings in a market and have a lower-income renter demographic

Multifamily characteristics

• Short-term leases: Most tenant leases are 1-2 years, resulting in 50% turnover per year

• Safety: Despite rollover, it is considered one of the safest asset classes, as landlords can easily drive occupancy

• Rapid Re-pricing: Due to short term leases, cash flows reset quickly, and assets are revaluated.

• Financing: U.S. government participation in multifamily lending results in positive leverage

Turnover (operating expenses)

Turnover costs are any costs associated with preparing an apartment for a new tenant after the current tenant has moved out.

Payroll (operating expenses)

Multifamily properties have two main categories of employees, which is leasing professionals and maintenance professionals (the number of each is dependent upon the size of the property)

Management Fees ( operating expenses)

Institutional owners typically pay a third party property manager to manage day to day task of owning the property, such as leasing maintenance.

Real estate taxes (operating expenses)

The largest operating expense for any real estate property is real estate taxes, and taxes vary by jurisdiction. Investors hire third-party consultants.

( Property sales often trigger tax reassessments)

T-3 Valuations

T-3 takes the latest 3 months and annualizes it by multiplying by 4. In rental environments that are rapidly changing, T-3 provides a more reliable foundation from which we will forecast future rental income and operating expenses.

Valuations fluctuate frequently based on recent performance.

Non-revenue unites

Model units, furnished for viewing or most commonly maintence staff to have a unit a live to be available at all times (these dont generate revenue)

(percentage of effective rent and after subtracting this you get total rental income)

Collection Loss

Uncollected rent,

(percentage of effective rent and after subtracting this you get total rental income)

Management Fees

Management Fees are calculated as a percentage of rental income

Replacement Reserves

It is not an actual cash flow; it is a “modeling tool.” Think about it as money set aside to replace large items when they break. In multifamily, it can also be a buffer for turnover costs when expenses like labor or paint increase.