📈Underwriting a Property at 50% Occupancy

Numbers Don't Lie: The only newsletter helping you become an expert commercial real estate underwriter every Saturday

Author

Justin Goodin
September 23, 2023

Heavy value-add deals are high risk, but high reward opportunities.

One of our readers asked what approach they should take when buying a property at 50% occupancy.

Underwriting the acquisition of a property that is not stabilized is no easy task. This will require careful consideration into the proforma, especially during the first few months after takeover.

Here’s how to underwrite a multifamily property that is 50% occupied in 3 steps:

Step 1: Create Lease-Up Proforma

  • Determine an accurate stabilization month.

  • Evaluate month by month how many units can be rented.

  • Work with your property management company to verify your assumptions.

Step 2: Model a Bridge Loan

  • Any property that is not stabilized (90% occupancy for at least 90 days) will most likely need to be purchased with a bridge loan.

  • Get in contact with a lender and determine the LTC amount they would be willing to lend.

  • Budget for interest reserves. The project will most likely not be able to cover the debt service payments in the first few months.

Step 3: Determine Expenses

  • Work with a property management company to determine your month by month operating expenses.

  • Expenses like advertising, G&A, and payroll could be significantly higher during the lease up as more resources will be required to reach stabilization. These expenses could then decrease once the project is stabilized.

  • Some operating expenses, utilities for example, will increase more and more as the project increases occupancy.

Whenever you’re ready, be sure to check out the Next Level Value-Add Underwriting model. Use this to underwrite to easily underwrite lease up scenarios.

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