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24-unit apartment building, 75 % loan, ten-year hold: pro forma, DSCR, loan sizing, sale and levered IRR

ToolReal Estate Pro Forma
SourceOffice of the Comptroller of the Currency (2022). Commercial Real Estate Lending. Comptroller's Handbook, Version 2.0, pp. 40, 43 and Appendix G (debt service coverage, debt yield, capitalization rate, effective gross income; the footnote-48 loan example); U.S. Department of Housing and Urban Development (2021). Multifamily Accelerated Processing (MAP) Guide. Handbook 4430.G, Sections 3.1.25, 3.7.11.1 and 7.8; Internal Revenue Service (2026). How To Depreciate Property. Publication 946, Tables A-6 and A-7a.
LevelProfessional

Problem

An illustrative 24-unit apartment building (8 one-bedroom units at 1,250 a month, 12 two-bedroom at 1,550, 4 three-bedroom at 1,850, rents growing 3 % a year) is bought for 3,400,000 with 68,000 of closing costs and 120,000 of improvements. Vacancy and credit loss are 6 % of potential gross income and other income is 14,400 a year growing 2 %. Expenses in year 1: insurance 14,400, utilities 950 per unit, repairs 1,100 per unit, payroll and administration 30,000 (all growing 3 %), property tax 42,000 (2.5 %), management 4 % of effective gross income, replacement reserve 300 per unit (3 %). The loan is 75 % of the price at 6.5 % with monthly payments on a 30-year amortization, a ten-year term and 1 point. The lender requires a DSCR of 1.25, at most 75 % loan-to-value and a debt yield of at least 9 %. The property is sold after ten years at an 8 % capitalization rate on the eleventh year's income with 3 % selling costs; the discount rate is 9 %. Find the year-1 income statement and ratios, the loan tests and the largest loan, the sale proceeds and the unlevered and levered returns.

Inputs to Enter

  • Price 3,400,000, closing costs 68,000, improvements 120,000; rent roll 8 x 1,250, 12 x 1,550, 4 x 1,850 per month, growth 3 %; vacancy 6 %, other income 14,400 growing 2 %
  • Expenses: insurance 14,400 fixed, utilities 950 per unit, repairs and maintenance 1,100 per unit, payroll and administration 30,000 fixed, all growing 3 %; property tax 42,000 growing 2.5 %; management 4 % of EGI; reserve 300 per unit growing 3 %
  • Loan 1: 75 % loan-to-value, 6.5 %, monthly payments, 30-year amortization, no interest-only years, 10-year term, 1 point; no second loan; lender tests DSCR 1.25, LTV 75 %, debt yield 9 %
  • Holding period 10 years, exit capitalization rate 8 %, selling costs 3 %, discount rate 9 %; tax estimate and waterfall off
Open the Real Estate Pro Forma tool (loaded with this example)

Answers

  • Sources and uses: loan 2,550,000, points 25,500, equity 1,063,500.00 of a total 3,613,500
  • Year 1: PGI 432,000, vacancy 25,920, EGI 420,480, operating expenses 159,619.20 (38.0 % of EGI), NOI 260,860.80; going-in cap rate 7.67 %, gross rent multiplier 7.870, break-even ratio 81.72 %, break-even occupancy 77.74 %
  • Loan: payment 16,117.73 a month, constant 7.585 %, debt service 193,412.82, DSCR 1.349 in year 1 rising to 1.764 in year 10, debt yield 10.23 %, cash flow before tax 67,448 (cash-on-cash 6.34 %)
  • Largest loan: 2,751,400.06 by DSCR, 2,550,000.00 by loan-to-value (governs), 2,898,453.33 by debt yield; positive leverage (cap rate 7.672 % above the 7.585 % constant)
  • Sale at the end of year 10: NOI of year 11 351,529.12 / 0.08 = 4,394,113.97, selling costs 131,823.42, loan payoff 2,161,791.22, net proceeds 2,100,499.33
  • Unlevered IRR 9.379 %, NPV 94,053.49; levered IRR 14.10 %, NPV 464,132.27; equity multiple 2.972; average cash-on-cash 9.97 %
  • Tornado of the levered IRR: rent growth ± 1 point 10.36 to 17.27 %, operating expenses ± 10 % 11.78 to 16.26 %, purchase price ± 5 % 12.41 to 15.84 %, loan rate ± 1 point 12.42 to 15.74 %, vacancy ± 2 points 12.91 to 15.25 %, exit cap rate ± 0.5 point 13.13 to 15.12 %
  • With the optional tax estimate (27.5-year straight line, 20 % land, 32 % / 15 % / 25 % rates): depreciable basis 2,894,400, after-tax levered IRR 11.99 %; with the optional waterfall (8 % preferred return, 20 % promote, 90 % investor capital): investors 13.13 %, sponsor 20.46 %

Notes

The tool's default inputs are this property; press Submit. The property is illustrative (stated on the method page), not a published example. The method is checked by test_real_estate_pro_forma.php (1,706 checks) against the OCC handbook's footnote-48 loan (6,443 a month, 899,000 balance after five years), the IRS Publication 946 and 527 depreciation tables and examples, and an independent numpy / scipy implementation on the default, seven variants and 20 seeded properties (References/Real-Estate-Pro-Forma/checks/).