Underwriting a 96 bed purpose-built deal where 40% of the beds turn every August

Question

Looking at a 96 bed purpose-built property, 24 four-bed units, half a mile from a flagship with roughly 34,000 enrollment that's grown about 1.5% a year for a decade. Seller's T12 shows 96.5% occupancy and effective rent of $780 a bed. Their turn cost line is $310 a bed and their concessions line is basically zero.

Two things bother me. First, the leases I pulled all run August to July with a hard 12 month term, and re-lease velocity in the offering memo shows 62% of returning tenants signing by the end of January. That implies about 40% of beds are being placed in a market that clears in a six week window. Second, the guarantee forms are drafted as rent-only, no damages, and about a third have no guarantor at all with a higher deposit instead.

What does a realistic turn cost and concession assumption look like at this scale, and how much should the rent-only guarantee wording move my bad debt number?

Rena Expert · Accepted Answer

$310 is a stabilized-year number in a market with slack labor, and neither condition is likely in a flagship market during the August turn. Purpose-built operators at your size typically carry a per-bed turn number that covers paint, carpet or LVP repair, cleaning, keys and lock cores, and the make-ready punch on the shared spaces, which are the parts a per-bed figure tends to leave out. The shared kitchen, living room and hallways in 24 units get consumed by four people each and don't appear in a per-bed line at all unless the seller allocated them. Ask for the actual invoices for two consecutive August turns rather than the T12 line, and separate materials from labor, because labor is what spikes when 40 beds and every competitor's beds move the same week.

On concessions at zero: that tells you the last leasing season cleared without them, and nothing about the next one. In student markets concessions show up late, in June and July, when the remaining beds are the leftover ones in four-bed units with three signed roommates. Those are the hardest beds in the building to place. Model something for the tail of the season even if it wasn't needed before.

Rent-only guarantees mean your bad debt exposure on unpaid rent is genuinely lower, and your damage recovery runs entirely through deposits. On the third of beds with no guarantor and a higher deposit instead, run the deposit against a realistic worst case, one skip plus damage, and see if it covers. It usually doesn't. Whether you can even apply a deposit that way depends on your state's deposit statutes and the notice and accounting timelines they impose, so have counsel in that state read the form.

The thing I'd chase harder than any of this is the university's own housing pipeline and any live-on requirement changes. A flagship growing 1.5% a year that adds 800 beds of its own can flatten your absorption in a single season, and that decision gets announced years before it lands. Enrollment growth at the institution is doing the work in your rent assumption, and campus supply is the variable that can break it while enrollment still looks fine.

nicole_adeyemi · Answer

$310 a bed for a turn where 40 beds move on the same weekend seems light to me before you even get to paint. You're paying premium labor rates because every property in town needs the same crews the same week.

paulgrant17 · Answer

The no-guarantor third with a higher deposit is interesting to me. How much higher does the deposit actually get in these? If it's one month it's not really pricing the risk.

brandonlee36 · Answer

@wren in my experience with regular units, an extra half month reads as pricing risk and does nothing when someone actually leaves. On 96 beds @fathom is going to have four or five of those a year no matter what the deposit says.

The shared area point from the official reply is the one I'd push on. I only have 11 units and the common area damage in my two roommate setups is consistently the line I underestimate. Multiply that by 24 units.

nataliehsu · Answer

Naive question but who does the August turn work at that scale? Is that an in-house crew, or are you competing with every other owner for the same three painters in town?

angela_burke · Answer

@plumb you're competing, and the crews know it. I run a service team and August in a college market is the one week a year I can quote whatever I want and still be booked out. Anyone underwriting turn labor at their normal off-season rate is going to miss. If @fathom can get a crew on retainer with the dates locked twelve months out that's worth real money versus the spot rate.

samantha_ruiz · Answer

62% returning by January doesn't sound bad to me for a four-bed product. What's the number you'd want to see? I've got no benchmark for purpose-built.

megan_doyle15 · Answer

Trying to follow this. If a bed doesn't lease by August does it just sit empty for the whole year? That seems like an enormous cliff for one leasing season to determine the entire year's revenue.

aliyah_b · Answer

@rigging basically yes, that's the structural thing about this sector. There's some mid-year placement from transfers and grad students but you can't plan on it. One bad leasing season is a full year at that occupancy.

joe_delgado5 · Answer

@fathom the number I'd want explained is the 96.5% occupancy. Is that physical occupancy in October, or is it an average across all twelve months? Those are very different, and a seller running toward the closing will quote you whichever is higher. Ask for a month by month bed count, not a percentage.

tylerbrooks9 · Answer

@flint that's the question I'd have asked too. A single annual percentage on a product where the whole year is set in one six week window tells you almost nothing.

Underwriting a 96 bed purpose-built deal where 40% of the beds turn every August

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