Prerequisites
- ✓Property data: acquisition price, capex estimate, beds
- ✓Stabilized RevPAB / OpEx assumptions
- ✓Debt structure parameters (LTV, rate, amortization, term)
TL;DR
Build year-by-year P&L: revenue ramp (lease-up curve), OpEx (mostly fixed), NOI, debt service, capex spending, exit at year 5 (NOI ÷ exit cap). Compute project IRR and equity IRR. Sensitivity on exit cap rate and stabilized occupancy. Aim project IRR ≥ 12-18% depending on market.
Why this matters
Coliving deal underwriting differs materially from multifamily and hotel underwriting in three ways: (1) lease-up curve modelling, coliving stabilization takes 6-18 months vs multifamily's 4-9, (2) operating margin volatility, coliving's 60-75% opex ratio means 100bps of operational miss compounds faster, (3) operator concentration, the operator can fail independently of the building, leaving the asset stranded.
The institutional underwriting standard: build a 60-month monthly proforma starting with lease-up assumptions (typical: 15-25 beds/month lease-up at $800-1,200 ARPU, hitting 88% by month 12-15), apply operator-side opex from observed comparable operators in the same market (not from the sponsor's pitch), debt service the conservative way (1.30 DSCR at stabilized NOI with a 1.10 floor during ramp).
Key sensitivities to run: 6-month delay in lease-up (-20% to year-1 IRR), 100bps cap rate expansion at exit (-300bps IRR over 5-year hold), 5pp lower stabilized occupancy (-200bps IRR + -8% equity multiple). LP-grade deals require all three sensitivities to still produce ≥1.4x equity multiple. Sponsor decks rarely show this.
Step-by-step
- 1
1. Set up the time grid
Months 1-60 (years 1-5). Include month 0 for acquisition + initial capex. Each row: revenue, OpEx, NOI, debt service, capex, free cash flow.
- 2
2. Model the lease-up curve
From 0% occupancy at opening to stabilized over 6-12 months in mature markets, 9-18 in new. Use S-curve approximation. Underestimate the lease-up at your peril.
- 3
3. Model OpEx
Fixed costs full from month 1 (insurance, base utilities, manager salary, debt service). Variable costs scale with occupancy (cleaning, supplies, channel commissions).
- 4
4. Project NOI
Revenue minus OpEx. Stabilizes by month 12-18 in mature markets.
- 5
5. Add debt service line
Use amortization schedule (simple Excel PMT works). Interest-only periods if applicable. Debt is mostly senior; mezz separately if used.
- 6
6. Model exit at month 60
Exit value = (Year 5 NOI × 12) ÷ exit cap rate. Subtract remaining debt principal. Subtract sale costs (typically 1.5-3%). Result is exit equity proceeds.
- 7
7. Compute IRRs
Project IRR (XIRR on net cash flows pre-debt). Equity IRR (XIRR on equity contribution + free cash flow + exit proceeds). The delta is leverage's contribution.
- 8
8. Sensitivity on top 3 variables
Exit cap rate ±100bps, stabilized occupancy ±5pp, ADR ±10%. Should produce a 9-cell IRR matrix that highlights the deal's risk profile.
Common issues + fixes
×Unrealistic lease-up curve
→Most underwriting models stabilize too fast. Compare to comparable operator filings; new property in new market = 12-18 months minimum.
×Exit cap rate compression assumption
→If you're modelling exit cap 100bps below going-in cap, justify with macro tailwind or value-creation thesis. Historical coliving cap compression has been ~150bps over 7 years; assuming more is aggressive.
×Excluding sale costs from exit proceeds
→Always include 1.5-3% disposition costs. Skipping these inflates equity IRR by 50-150bps depending on hold period.
Frequently Asked Questions
What IRR target should I use?
Stabilized Western markets: 8-14% project IRR over 5-7 year hold. Emerging markets / value-add: 14-22%. Development from greenfield: 18-25% reflecting development risk.
How sensitive is coliving IRR to exit cap rate?
Highly. ±50bps exit cap typically swings IRR ±150-250bps. This is usually the single largest sensitivity. Always show this.
Should I use project IRR or equity IRR?
Both. Project IRR shows deal economics independent of leverage. Equity IRR shows what you actually earn after debt. The difference is leverage's contribution, useful for comparing across capital structures.
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