Who asked: an investment committee at a small property fund (made up for practice). A broker is offering Linden Court, a 40-unit apartment building, at a 5.5% cap rate. The committee wants to know whether to bid.
The data: the rent roll in one line (units and rent), vacancy, other income, expenses, the purchase cap rate, a loan offer with two interest-only years, an exit cap rate and the fund's return and coverage targets, all in the Inputs block.
What done looks like: five years of NOI and cash flow, the price, loan and equity, debt service and coverage each year, the sale at the end of year 5, the levered IRR and equity multiple, and a Bid or Pass. Practice only, not investment advice.
Property is valued on net operating income (NOI): rent collected plus other income, less operating expenses, before debt. The cap rate links the two: price = NOI / cap rate. This project builds a buyer's model in ten steps, on one sheet:
- rent; 2. effective gross income after vacancy; 3. NOI and cash flow before debt; 4. price, loan and equity; 5. debt service with interest-only years; 6. cash after debt and coverage; 7. the sale at the exit cap rate; 8. the equity cash flows; 9. levered IRR and equity multiple; 10. the decision.
Two things move the answer most. The exit cap rate: selling at a higher cap rate than you bought at means each dollar of NOI is worth less at the end. And debt service coverage, NOI / debt service, which lenders test every year: it dips when interest-only years end and principal repayment begins.