How can I analyze a multi family property given costar reports?
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[{"id": "gax44qu", "text": "What are costar reports?   \n\n\nWhat is DCF?\n\n&amp;#x200B;\n\nYou're doing a \"case\"? Is this a RE class or something? Are you trying to get us to do your homework?", "replies": [{"id": "gax45uz", "text": "DCF  may refer to:\n\n\n== Medical ==\nData clarification form in clinical trials\nD\u00e9nomination Commune Fran\u00e7aise, a formal French generic name for a drug\n\n\n== Organizations ==\nChild Protective Services, called Department of Children and Families in some U.S. states\nConnecticut Department of Children and Families\nFlorida Department of Children and Families\nVermont Department for Children and Families\nWisconsin Department of Children and Families\nDCF Advertising, an American advertising agency\nDelaware Community Foundation, a charitable organization\nDominion Car and Foundry, a former Canadian railcar maker\nDonors Capital Fund, a Virginia-based donor advised charity\n\n\n== Science ==\nDichlorofluorescein, a fluorescent dye\nL-dopachrome isomerase, also called dopachrome conversion factor\n\n\n== Technology ==\nDCF77, time signal radio station in Germany.\nDebian Control File, a simple format for storing databases in plain text files\nDesign rule for Camera File system, file system specification for digital cameras\nDevice Configuration File, an element of the CANopen communication protocol\nDisk Copy Fast, a floppy-disk imaging software\nDistributed coordination function, WLAN technique\nDouble-clad fiber\nDocument Composition Facility, IBM software\n\n\n== Other uses ==\nCanefield Airport, Roseau, Dominica (IATA airport code)\nDallas Christmas Festival\nDiscounted cash flow, the financial concept\nDirect Consular Filing, process related to immigration, US\nDorothy Canfield Fisher Children's Book Award, Vermont, US\nDyneema Composite Fabric, a high-performance non-woven composite material used in high-strength, low-weight applications.\nSupervised injection site, also called drug consumption facility\nThe theory of differentially closed fields\n\nMore details here: https://en.wikipedia.org/wiki/DCF \n\n\n\n*This comment was left automatically (by a bot). If something's wrong, please, report it.*\n\n*Really hope this was useful and relevant :D*\n\n*If I don't get this right, don't get mad at me, I'm still learning!*", "replies": [{"id": "gax78c3", "text": "bad bot", "replies": [], "depth": 3}], "depth": 2}, {"id": "gax5a5c", "text": "Nah it\u2019s more like a hands on project for a club. Costar reports basically give you basic finance info on the market (avg rent, absorption, etc). I know how to start it but just need some direction. And how can you be in this sub and not know what a DCF/costar is??", "replies": [{"id": "gax9685", "text": "I think they were just poking fun at the new guy trying to get us to do his homework. \n\nBasically, what they're asking you to do is determine what the over invest-ability of the project is and giving you some good source material and data to start. I would think about this in 3-4 steps. \n\nOne, build out an income model - which will start with current rents, or market rents and grows them at a nominal rate. Make sure you include other income like late fees, laundry income, etc. Don't forget to take out economic vacancy, real vacancy, etc... Two, build out an expenses model - you might need to figure this on out yourself (idk what CoStar provides) but there are things you can always check yourself like real estate taxes and go from there. \n\nI would pencil 50-60% expense ratio in year one and grow it from there to get you started. Typical multifamily expenses are payroll, admin, marketing, R&amp;M, contracts, management fees, taxes, and insurance. Now you have an NOI and free cash flow (make sure you take out asset management fee assuming you have one, and debt)...ask yourself these questions. How well does this asset perform as is? Would your investors like to put their money into it? What are their returns? (btw. insider tip: For the acquisition debt, if you're allowed to decide, I would model at 80% LTV with 2 years I/O at 3%-3.25% interest and people can tell me to fuck off if they don't agree lol) \n\nThe next step is to figure out if you want to renovate. For this step you need to figure out costs (to do the renovation) and the rents you can achieve if you go forward with the renovation. If the value created from the renovation is more than the cost to do the renovation then you would obviously want to move forward. \n\nI would build two models. One as is, one if you renovate. Compare them side by side. Hopefully that helps. Don't listen to the chatter in the group - I wish more people we're outwardly helpful and not sarcastic, but, alas, everyone in CRE and this group thinks they are gods gift to planet fucking earth. They are not. I am not either.", "replies": [{"id": "gaxf9v1", "text": "&gt; (btw. insider tip: For the acquisition debt, if you're allowed to decide, I would model at 80% LTV with 2 years I/O at 3%-3.25% interest and people can tell me to fuck off if they don't agree lol)\n\nI'm not gonna tell you to F Off but I do want to know who your banker is...", "replies": [{"id": "gaxgp70", "text": "Its merely an academic exercise. So...its not real. Just a place to start. Also, I do affordable housing with major low income component so its not a great comparison for market rate. Again, just purely an academic exercise, so I am not being too critical here.", "replies": [{"id": "gaxhe38", "text": "I'm not arguing I was just hoping you knew someplace to get 80% LTV 2 years IO for market rate stuff. Lately my deals are getting killed by the bankers who want 1.25 DSCR on in-place rents.", "replies": [{"id": "gaxl4ad", "text": "Yeah - not my cup of tea. I would be really cautious lending on market rate stuff right now too, if I were them. Especially on the coasts or in historically strong submarkets. Real shift is going on now in the real estate world and my prediction is that if you can live, say, an hour and a half or less from a tier 1 city because you are only *required* to be in the office one-two days a week/month, then the best markets for forward appreciation and rent growth are actually not major cities anymore but the suburbs and towns that surround them. Food for thought. Would love to know your thoughts too.", "replies": [{"id": "gaxotpk", "text": "I wrote something up to that effect in May or June and the data I look at supports it thus far.  I know some commentators are saying that a shift to the suburbs is all hearsay at this point, but not according to my data.  And yeah the whole once-or-twice a week in the office thing is why I think it's got sticking power.", "replies": [], "depth": 8}, {"id": "gaylkbu", "text": "Context: Top 100 (according to CoStar total asset value) multifamily market in the Sunbelt. You probably don't want all my thoughts, because there are a lot of them. \n\nI agree with you about the major shifts. In the office 1-2 days/week, sure, live 1.5 hrs away. But I have peers working at FAANG who have vacated the Bay Area completely and may never go back. If your company only needs you physically present 1-2 days/month, most companies are going to find a way to bring that down to actual zero and significantly reduce expenses.\n\nI have thought \"we're moving HQ downtown to hire millennials\" has been wrong for 4-5 years. 22 year olds graduating from college want to live downtown. The oldest millennials are turning 40, if not this year then in the next couple. The youngest of us are already 24. People want to raise kids in houses, not apartments. They want a yard for the dog. If it's an apartment, they want garden-style, maximum of 1 flight of steps. Nobody wants to carry a stroller to a 4th-floor walkup, no matter how cool of a loft it is. Covid is only going to accelerate that. I don't know if it's the 50s all over again, flocking to the suburbs like our grandparents. But people are definitely going to pursue less density in climates where they can play and socialize outdoors 10-12 months out of the year.\n\nI think most of the core markets can survive. NYC, LA, and Chicago are all diversified blue chip economies and all have enough inertia to get through this. DC has the capital to carry it along. I don't know much about Boston at all. I'm worried about the Bay Area due to the distributable nature of its employment drivers (Twitter sent everybody home forever) and the fact that it was already bleeding employers and talent to places like Texas. Speaking of Texas, I think the Texan metros are set to thrive since they are basically already what you describe - employment cores surrounded by seemingly endless tracts of low-density residential product of various types.\n\nObservationally, I'm seeing it locally. Tons of plates moving in from California, NY and NJ over the past 8 months. Our starter home builders never even slowed down.\n\nI guess that's a long way of saying I don't see why they're giving me a hard time about a 1.25 DSCR on value-adds that haven't seen a rent bump in a decade.", "replies": [], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "gax9yw7", "text": "Gee, I dunno. I only own 4 buildings/25 units. I'm really residential not commercial but bigger residential becomes \"commercial\" according to the banks.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gax7pm6", "text": "If you have a specific property from Costar you should be able to put together some Revenue and Expense assumptions to get to a Year 0  Proforma NOI. Grow the revenue and expense assumptions by some factor year over year, call it a 5 year hold period. Size your debt based on your Proforma NOI w/ a 1.2 DSCR, through some closing cost/financing costs assumptions in the capital stack to get to your equity need. That should spit out IRR, cap rate and cash on cash metrics. Do the exact same thing, except with an up-front renovation budget and higher rents to reflect a value-add scenario. Compare the metrics to each other and what you're seeing in the market based on Costar to see if they're worth it. You didn't mention a purchase price, so I guess it's more a question on 'what price would I buy this at to give my investors an attractive return in this market'. So that'll just be your input, run a sensitivity analysis on purchase price if you want to get fancy.", "replies": [{"id": "gch6ue0", "text": "To add on the Reno piece.. look at the last time the building went under renovation. If it was 6+ years ago the failure rate on material in the units will grow. You can look at purchasing trends from the property to understand the compounding costs of replacement materials on those older units. Then check any potential tax breaks on energy efficient models you could have replaced to find a long term gain for the project.", "replies": [], "depth": 2}], "depth": 1}, {"id": "gax7vx4", "text": "Yes, run DCF with costar info on market, but be sure to decide where your property falls within the market and don\u2019t just use averages. Don\u2019t forget profit on renovations and lease up time and costs. Run sensitivity analysis on reversion cap rate, and on discount rates. \n\nCould be a fun/educational exercise!\n\nETA - often apartments don\u2019t need DCF once they are stabilized. They are more commonly capped.", "replies": [], "depth": 1}, {"id": "gaxm8h5", "text": "There are a ton of terms being thrown around here, some incorrectly, that are worth looking up if you are unfamiliar: Operating Statements, DCF, IRR, terminal/exit value, free cashflow, DSCR, contract vs market rents, lease up, are all worthy of some research. Have you been supplied with an offering price or are you being asked to solve for this number? Are you getting an operating statement  or being asked to create one from expenses and pro-forma rents supplied? This would be my first step - understanding what is in-place (contracted and known amounts) vs what you will project for the hold period. I like some of the information here that's specific to multifamily [https://hud221d4.loan/hud-221d4-detailed-operating-statement-underwriting-analysis](https://hud221d4.loan/hud-221d4-detailed-operating-statement-underwriting-analysis). Once you have this step completed you can create a 5-10 year cashflow projection. A very basic primer - [https://www.ccim.com/cire-magazine/articles/excel-financial-analysis-calculations/](https://www.ccim.com/cire-magazine/articles/excel-financial-analysis-calculations/)", "replies": [], "depth": 1}, {"id": "gaxzv91", "text": "Costar info is mostly tied to [Apartments.com](https://Aparrtments.com) information. You can research your nearby rental comps and check on renovation finish levels at [Apartments.com](https://Apartments.com) to see if they match the proposed finishes that your case will be using.\n\nWhen you've averaged out the possible market rents on renovated units from your Costar comps, then you can model in your proposed renovation premiums per unit type. Also don't forget that in practice, you generally will not be able to turn more than 4-6 units per month depending on your maintenance crew's bandwidth. For example, on average if you are turning units on a 100 door property at $6000 - $7000 per door for interiors, I would estimate at least 18-24 mos to get the turns finished. Especially if you are modeling a stabilized value-add property and are going in on a 90%+ occupied perm loan. \n\nSomeone in this thread mentioned sub 4% rates and 80% LTVs... That would more than likely be an agency perm loan and you won't want to sacrifice vacancy by being aggressive on unit turns. Otherwise, I'd model a bridge loan so you can do a heavier reposition and risk emptying the building a bit beyond normal expirations.\n\nRealistically, if you are going to charge hard on renovations, you might add some $$ to the per-unit renovation price as well as increase vacancy during the renovation period. There are many companies that will come in and install the renovation kit to help increase the onsite maintenance crew's bandwidth. This is especially important during the summer when maintenance will be dealing with HVACS and other priority items on the site. \n\nWe generally will underwrite 6 mos of company/management stabilization post-closing and start renovations after that 6 mos. Then during the renovation period we strip any \"organinc\" market rent increases and focus on rolling in the rent premiums on an average basis. Then when renovations are done, we will phase out the renovation bumps and start rolling in market rent increases. The Costar report will help target avg market rent increase YoY and quarter over quarter. Generally, we cut market rent growth displayed in Costar in half for underwriting.\n\nThe cap rate calcs in Costar are just ok but I would not rely on it totally. If you are required to stay within the Costar report as part of the lesson then it should be ok as long as you are not dealing with a non-disclosure state like Texas where the sale info cannot be trusted.", "replies": [], "depth": 1}, {"id": "gbzh7pg", "text": "Curious, did you ever get this figured out? I'm a MF broker in Florida with 5 years of analyst experience. Happy to help/be a resource if you still need it.", "replies": [], "depth": 1}]