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$118k a door on a 1985 value-add versus $198k on a 2023 lease-up: is basis the wrong axis to compare on

Two deals worth comparing at the same equity check size. Deal A: 176 units, 1985 vintage, garden style, inner-ring suburb of a midwest metro. $118k a door. Rents about $310 under renovated comps in a two mile ring. Plan is $22k a unit inside plus roughly $1.8m of exterior and systems work, roof, parking lot, two boilers, and a full electrical panel replacement across eight buildings. Occupancy 91, delinquency 4 percent, with a resident quality component to the plan as well. In-place cap 5.8, stabilized cap on cost 6.9. Deal B: 288 units, delivered 2023, currently 74 percent leased with two months free on new leases, construction loan maturing. $198k a door against a builder's all-in cost of about $254k, so roughly 22 percent under cost with zero renovation risk on a brand new asset. In-place cap on the concession-burdened income is 4.1. Untrended stabilized, meaning today's asking rents with concessions gone and 93 percent occupancy, gets to 5.5. Deal A has more spread on paper and is a familiar renovation playbook. Deal B has no construction risk, no roof, no scope creep, and a basis a replacement-cost buyer would likely view as cheap in three years. What Deal B carries instead is concession burn-off risk, and every month that doesn't burn off is a month of negative leverage on a 4.1 in-place cap. The piece that deserves the most scrutiny is that Deal A's $310 rent gap is measured against renovated comps in a submarket where a 2023 building nearby is giving away eight weeks free. If new supply is discounting that heavily, a renovated 1985 unit ends up competing on effective rent much closer to that new unit than the headline gap suggests, which can shrink a $310 gap to something closer to $150 in practice. Timeline pressure often forces a decision on the value-add deal before the lease-up's concession burn-off is even resolved, which is itself a piece of information worth weighing.

devon_pierce SS4APRO 15

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omar_haddadPassivePRO

Wrong handle on that, it's @devon_pierce's post, I'm replying.

The $22k a unit on a 1985 garden with eight panels being replaced is where I'd stop. Panel replacement means permit, means inspection, means the inspector looks at whatever else is in that wall, and on a 1985 building in a lot of jurisdictions that's aluminum branch wiring or a mixed panel that nobody documented. I've had a $9k electrical scope turn into $31k because the inspector wouldn't sign off without pigtailing every device in the building. That is scope creep with a permit number on it, so you can't defer it.

Also $22k interior on 1985 stock, tell me what's in it. If it's flooring, paint, counters, appliances and lighting, that's a $14k to $16k package in most midwest markets and the extra six is either cabinets or plumbing. If it's cabinets you're fine. If it's plumbing you're opening walls in a building with cast iron stacks and galvanized branch lines, and then you're not doing 176 units in eighteen months, you're doing 90 and asking the lender for an extension.

On your real question, your $310 gap and the eight weeks free are the same number viewed twice, and I think you already know that. What I'd do before Friday is pull the renovated comps' effective rents, not asking rents. Call four of them as a shopper. If the renovated 1985 comps are also giving concessions, the gap is $150 and Deal A's stabilized 6.9 is a 6.2, at which point B's clean 5.5 with no execution risk and a basis 22 percent under cost looks better than it did an hour ago. B having no deadline tells you the maturing construction loan hasn't gotten scary yet. It will.

omar_haddadPassivePRO

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