24-unit multifamily value-add, and why it does not clear
The same 24-unit building behind the sample deal Altyst seeds into a new workspace, run start to finish at the seller's $3.6M ask. At that price year-one coverage is 1.07x against a 1.20x minimum, and the levered IRR of 6.00% is 900 basis points below the 15.00% target. The model says so. The sample seeded into a new workspace is the same asset bought right, at a basis and debt terms where it clears.
Northgate Court is not a real property. Every property in this library is fabricated. There is no address, no listing, no broker, no lender and no transaction behind any of it. The figures are model outputs for illustration, not a valuation, an offer, or investment, legal, tax, appraisal or brokerage advice.
The assumptions
Everything below is an input. Nothing here was inferred, smoothed, or filled in from a market average.
Property and business plan
- Units
- 24
- Rentable area
- 18,600 SF
- In-place rent
- $1,095 / unit / month
- Market rent
- $1,275 / unit / month
- Renovation budget
- 16 units at $7,500, over 18 months
- Rent ramp
- $1,095 to $1,275 property average, over 2 years
- Hold
- 5 years
- Asking price
- $3,600,000
Debt and exit
- Sizing
- 65% loan-to-value
- Rate
- 6.20% fixed
- Interest-only
- 1 year
- Amortization
- 30 years
- Exit cap
- 5.75% on forward NOI
Negative leverage, stated plainly
Year-one NOI of $155,960 on a $3.6M price is a 4.33% going-in cap. The loan costs 6.20%. Borrowing at 6.20% against an asset yielding 4.33% is negative leverage, and it is why levered IRR (6.00%) lands below unlevered IRR (6.24%). The debt is subtracting from the return, not adding to it.
Value-add buyers accept negative leverage when the NOI ramp is steep enough to fix it. Here it does: the going-in cap of 4.33% becomes a 6.13% stabilized cap by year three. The question the model answers is whether that ramp arrives fast enough to pay for the five years of waiting. It does not.
The loan does not size
At 65% loan-to-value the year-one coverage is 1.07x. No lender funds that. A 1.20x minimum coverage test caps the price at $3,224,872. The 15.00% return target caps it lower still, at $3,017,417, which is why that is the binding price. The 1.60x equity-multiple test is the loosest of the three here, at $3,313,501.
This is worth sitting with: the deal fails on the debt before it fails on the return. A model that reports only IRR would hand you a 6.00% number and let you discover the coverage problem in a lender's term sheet three weeks later.
The downside is not a haircut
The downside case here is not a rounding adjustment. Rent growth at 40% of base, expenses growing 20% faster, 75 basis points of cap expansion, three points of vacancy and 100 basis points on the rate together return 0.08x on the equity. Nearly all of it is gone.
That fragility is a direct consequence of the coverage. A deal with 1.07x going-in coverage has no room between its NOI and its debt service to absorb anything at all.
Operating pro forma
Figures in thousands of dollars. Negative amounts are in parentheses, the way an operating statement writes them.
| Line | Yr 1 | Yr 2 | Yr 3 | Yr 4 | Yr 5 |
|---|---|---|---|---|---|
| Gross potential rent | 315 | 352 | 390 | 401 | 413 |
| Other income and recoveries | 13 | 13 | 14 | 14 | 15 |
| Vacancy and credit loss | (20) | (21) | (21) | (22) | (23) |
| Effective gross income | 308 | 344 | 382 | 393 | 405 |
| Operating expenses | (152) | (157) | (161) | (166) | (171) |
| Net operating income | 156 | 187 | 221 | 227 | 234 |
| Capital items | (128) | (84) | (8) | (8) | (8) |
| Debt service | (145) | (172) | (172) | (172) | (172) |
| Levered cash flow (final year includes the sale) | (117) | (69) | 41 | 48 | 1,948 |
| DSCR | 1.07x | 1.09x | 1.28x | 1.32x | 1.36x |
Sources and uses, and the exit
Uses at close
- Purchase price
- $3,600,000
- Acquisition costs
- $72,000
- Financing fees
- $23,400
- Total uses
- $3,695,400
Sources at close
- Senior loan
- $2,340,000
- Equity at close
- $1,355,400
- Total sources
- $3,695,400
Exit
- Forward NOI at exit
- $241,245
- Sale price
- $4,195,560
- Selling costs
- ($83,911)
- Loan payoff
- ($2,218,232)
- Net sale proceeds
- $1,893,417
Downside and upside
The same three cases the product runs on every deal. The downside is not a haircut on the answer, it is a full re-underwrite with the assumptions moved.
| Case | Levered IRR | Equity multiple | Year-1 DSCR | What moved |
|---|---|---|---|---|
| Downside | -44.0% | 0.08x | 0.87x | Rent growth at 40% of base, expenses growing 20% faster, exit cap 75 bps wider, vacancy 3 points higher, rate 100 bps higher. |
| Base | 6.0% | 1.32x | 1.07x | The assumptions listed on this page, unchanged. |
| Upside | 19.9% | 2.39x | 1.14x | Rent growth at 140% of base, expenses growing 10% slower, exit cap 50 bps tighter, vacancy 1 point lower, rate 25 bps lower. |
Levered IRR against price and exit cap
Rows are the exit cap rate, columns the purchase price. The centre cell is the base case on this page, so the grid checks itself.
| Exit cap | $3,240,000 | $3,420,000 | $3,600,000 | $3,780,000 | $3,960,000 |
|---|---|---|---|---|---|
| 5.25% | 15.2% | 12.5% | 10.0% | 7.4% | 5.0% |
| 5.50% | 13.3% | 10.6% | 8.0% | 5.4% | 2.8% |
| 5.75% | 11.5% | 8.7% | 6.0% | 3.3% | 0.7% |
| 6.00% | 9.7% | 6.9% | 4.1% | 1.3% | -1.5% |
| 6.25% | 8.0% | 5.1% | 2.2% | -0.7% | -3.6% |
Against these hurdles
A recommendation is only worth anything next to the targets it was measured against. These are this example's own hurdles. In the product they are yours, and you edit them.
The hurdles used here
- Target levered IRR
- 15.00%
- Minimum year-1 DSCR
- 1.20x
- Minimum equity multiple
- 1.60x
Altyst does not supply a target return. It tests the model against the numbers you set.
Reprice
- Levered IRR of 6.00% is 900 basis points below the 15.00% target.
- Coverage of 1.07x fails the 1.20x minimum, so the loan does not size.
- Equity multiple of 1.32x misses the 1.60x minimum.
- A price of $3.02M, 16.18% below the asking price, clears all three.
What clears, and at what price
Each price below is solved by re-underwriting the whole model at that price until the constraint is met. The binding price is the lowest of the three, because a deal has to satisfy every hurdle, not the easiest one.
- Asking price
- $3,600,000
- Price for the target levered IRR
- $3,017,417
- Price for the minimum DSCR
- $3,224,872
- Price for the minimum equity multiple
- $3,313,501
- Value at the target going-in cap (5.75%)
- $2,712,351
- Binding price, the lowest of the three hurdle prices
- $3,017,417
- How the six pages in this library were classified, against the hurdles printed above and nothing else.
- Advance: all three hurdles clear at the asking price.
- IC Review: coverage and equity multiple clear, and the levered IRR misses by less than 100 basis points.
- Reprice: a hurdle fails at the asking price, and a lower price is published at which all three clear.
- Reject: no price in the search band clears every hurdle.
- In the product the same six words come from a wider test that also weighs average cash-on-cash, the downside case and a composite score. Three hurdles clearing is necessary for Advance, not sufficient, and Reject there is a downside test rather than a price search.
Checking this yourself
Every figure came from the same deterministic engine the product runs, in exact decimal arithmetic. The same inputs produce the same result every time, which is what makes a page like this worth publishing at all.
The inputs are on this page in full. Rebuild it in a spreadsheet and the lines should agree. Where a number surprises you, the line above it is usually the reason, and the calculation methodology states the convention used for every one.
Permanent link: https://altyst.ai/models/24-unit-multifamily-value-add
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