Stabilized Returns

What are Stabilized Returns?

The term “Stabilized Returns” can be a broad statement in terms of Real Estate. For our purposes, Stabilized Returns are a forward-looking investment metric used by investors to gauge what their return will get on their money after any and all “value add” work has been completed. This metric is usually calculated as a percentage. Stabilized Returns can also be known as Stabilized Return-on-cost and it is calculated as follows:

= Net cash flow (before debt service)/ sum of the acquisition price, closing costs, and renovations costs

Many investors that mainly deal with “value add” investments look to stabilized returns to find and show the consistent returns they will be making over time. As these types of investors are more likely to purchase run-down properties for way below market value, this metric heavily benefits them. While it is useful to all types of investors, it complements the investment strategies of “value add” projects.

Stabilized Properties

To understand what stabilized returns are, you first need to understand what makes a property stabilized. A stabilized property is a property that has achieved an occupancy rate of at least 80-90% for a period of no less than one full calendar quarter however this may change depending on the state laws of the property in question. This type of property is not considered an Acquisition Property, Construction-in-Process, or Eligible land.

CAP Rate vs. Stabilized Return-On-Cost

Going-in CAP does not take into account any “value-add” investments into the project. Your rate of return after the property is leased and value-added into the property is more in line with what Stabilized Return offers you. It is also a more relevant metric when considering all types of costs associated with a development project. Both metrics take into account the market value of the land/buildings within the project, but the Stabilized return takes all costs associated with the value, this includes closing costs, acquisitions price, and renovation costs.

Stabilized Returns in Action

We are going to look at a Multi-Family Acquisitions model from Top Shelf Academy to see how we can perform this metric. They elected to use a CAP rate in this model, but you can find everything you need here to create a Stabilized Return metric. To start, we can find the acquisition price, the closing costs, and renovation costs relatively easily. We can see here that the purchase price is $28,200,000 and the closing costs are $1,228,123.

Purchase Price and closing costs were provided and to get the renovation costs, we needed to sum the total for all of the line items for renovation costs to get the Total Renovation costs of $867,914.

As there is no line item for Net Cash Flows, we are going to use a stabilized NOI which will be the NOI 12 months after the occupancy rate hits 100%. This will be from 7/31/18 through 6/31/19 and the summation of the NOI (not NOI – After Reserves) will be $1,906,786. The stabilization status of the property, the occupancy percentage, and NOI are all highlighted in yellow. The NOI figure was the summation of all of the NOI calculations from the stated date range.

With all of these numbers, we can now go ahead and make our calculation for Stabilized Return-on-Cost. This will show that our Stabilized Return-on-Cost will be 6.29%. (See figure below for calculations)

Conclusion

Stabilized returns can be a useful metric for any investors that base their purchases on buying “value add” properties. Stabilized returns are a more holistic metric which will reflect the yield of a deal after a business plan has been executed.  

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About the Author

Eric Bergin is the founder of TSM. He realized that there was a need for real estate financial models that were more than just generic templates. He wanted to create a personalized product for his customers that would ensure success for them and their company. Please reach out to him if you have any questions about stabilized returns or if he can help you with your modeling needs.