Modeling Interior Renovations…the right way!

Most underwriting models get this wrong – Interior Renovations

Are your income projections over-inflated in your underwriting model?

With any standard value-add business plan, the basic concept is to renovate the unit interiors and re-lease them for higher rates. Sounds simple right?

To accurately model a value-add business plan, you must account for units being down during renovation (collecting no income) and the remarketing period (finding a new tenant).


Here’s the issue I have with most value-add underwriting models:

❌ Most underwriting models out there show the unit being renovated, re-leased, and the rent premium being collected all in the same month.

If you are a multifamily operator, you know this is simply not the case in the real world.

Here is a screenshot of the renovation timing schedule from a popular underwriting model out there:

As you can see, the model does not account for any units being down during the renovation period. 10 units are renovated, re-leased, and it shows the new rent ($600) being collected all in the same month! This is not realistic…

Clearly, this is an easy way to over-inflate your projections.


How to accurately model a value-add business plan:

I’ve seen it happen…

Timelines get delayed. Things come up. Contractors over promise. Tenants cancel their application. The list goes on!

Simply stated, unit renovations and re-leasing those units can take time.

✅ In the Next Level Value Add Modelwe can specify exactly how many months the unit will be down and how long it will take to remarket the unit.

So if we expect the interior renovation to last X month(s), we can accurately model that. If we think it will take another X month(s) to find a tenant and have them move in, we can accurately model that situation as well.

In the above example, we start unit renovations in Month 1 (5 each month), but do not see the rent premium realized until Month 3.

This is because we model the unit being offline 1 month for renovation and then another month to remarket the unit. (You can click the picture to enlarge, it may be difficult to see on your screen)

Yes, this will impact our net operating income, but it’s an accurate way to model interior unit renovations. Do you agree?


Best Practices

If your underwriting model does not allow you to account for down months, be sure to significantly increase your physical vacancy during your planned renovation period.

If you are a passive investor, be sure to ask the sponsor how they are accurately modeling their renovation timing schedule. As you can imagine, modeling this incorrectly can easily over-inflate the projections.

The Next Level Value Add Model accounts for down months due to renovation and remarketing the unit. This is the most accurate way to model interior renovations.