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.
Step-by-step
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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.
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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.
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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).
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4. Project NOI
Revenue minus OpEx. Stabilizes by month 12–18 in mature markets.
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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.
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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.
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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.
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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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