How to Review a Real Estate Acquisition Model

Real estate models look simpler than corporate models. There's no balance sheet, no working capital and usually one debt tranche. That's exactly why mistakes slip through. Everyone assumes the pro forma is fine, and a few basis points here and there add up to a full point of IRR.

This checklist walks through a real estate acquisition model from the rent roll to the returns, using SheetRank's Institutional 5-Year Multifamily Acquisition. It's a 300-unit property bought for $75 million, financed at 65% loan-to-value with a 6% loan on 30-year amortization, held five years and sold at a 5.5% cap rate. Built correctly, it shows a levered IRR of 18.7% and a 2.25x equity multiple.

What common mistakes do to the levered IRR

None of these breaks the model. Each one just quietly moves the answer, and most of them move it up, which is the direction nobody questions.

Try it

Work out NOI and the cap rate

Rent after vacancy, less operating expenses, is NOI. NOI over the price is the cap rate.

Net operating income: fill B5 (1 of 2)

	A	B
1	Gross potential rent	$1,200,000
2	Vacancy	5.0%
3	Operating expenses	$420,000
4	Purchase price	$12,000,000
5	Net operating income
6	Cap rate

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Check

Tap cells to put them in the formula. On a laptop you can type the numbers and operators.

Just need the number? Use the free cap rate calculator.

1. The rent roll

Start at the source of all revenue.

• Do the units add up? Here the unit mix is 40 studios, 130 one-beds, 90 two-beds and 40 three-beds, which sums to 300. If the unit mix total doesn't match the unit count used elsewhere, revenue and per-unit metrics disagree.
• Is each floor plan's rent multiplied by its own unit count? A wrong-row reference in one floor plan (two-bed units times three-bed rent, for example) changes gross potential rent without changing anything you'd see at a glance.
• Does the weighted average make sense? Gross potential rent of $7.2 million over 300 units is $2,000 a month, which should match the in-place rent assumption.

2. Vacancy and effective gross income

Vacancy and credit loss apply to all rental revenue, usually including other income like parking and fees. In this model, applying vacancy only to rent and leaving other income untouched lifts the levered IRR from 18.7% to 19.0%. Check that the deduction line uses the same base as the income it's deducting from.

3. Operating expenses

• Growth. Each expense should grow at the expense inflation rate from Year 1, not from Year 0 and not at the rent growth rate.
• Management fee base. Management fees are a percentage of effective gross income. In our model the fee is 3% of EGI, about $225,000 in Year 1. Point it at the real estate tax line instead and it shrinks to about $37,000, NOI is overstated, and the IRR rises to 19.3%. The Year 1 debt service coverage ratio also improves from 1.34x to 1.40x, which could change how much a lender would lend.
• Taxes after sale. Some deals reassess property taxes at purchase. If the model carries the seller's tax bill forward, NOI is overstated from day one.

4. NOI and below-the-line items

NOI is effective gross income minus operating expenses. It doesn't include debt service, capex reserves or leasing costs. Those come out below NOI to get to cash flow.

The common slip is skipping the capex reserve in cash flow. Here the reserve is $300 per unit per year, $90,000 total. Leave it out and levered cash flow rises every year, taking the IRR from 18.7% to 18.9%.

5. Debt sizing

Lenders size loans as the lesser of what several tests allow: loan-to-value, debt service coverage and sometimes debt yield. In this model the 65% LTV gives $48.75 million and the 1.25x DSCR test would allow more, so LTV binds.

Check three things:

• The sizing formula takes the minimum of the tests, not just LTV.
• Debt service uses the actual amortization, not interest only, unless the loan is interest only.
• DSCR is calculated on NOI, not on cash flow after capex.

6. The exit

This is where the biggest swing in the table comes from.

• Forward NOI. Buyers price a property on the next twelve months of income. Exit value should use the NOI for the year after the hold ends, not the final year's trailing NOI. Here, using trailing NOI cuts the sale price from $101.6 million to $98.4 million and the levered IRR from 18.7% to 17.4%.
• Cost of sale. Broker fees and closing costs come off the gross price. Leaving out the 2% cost of sale here adds about $2 million to proceeds and lifts the IRR to 19.5%.
• Loan repayment. Net proceeds to equity are after repaying the remaining loan balance, which is the ending balance in the exit year.

7. Returns

• The equity check at Year 0 includes acquisition costs, not just price minus debt.
• Levered cash flows are cash flow after debt service and reserves, with the sale proceeds net of loan payoff in the final year.
• Unlevered cash flows use NOI less reserves, with the full purchase cost at Year 0 and net sale price at exit. Here the unlevered IRR is 11.4%, comfortably below the levered 18.7%, which is what positive leverage should look like.

A fifteen-minute review order

Practice it

You can audit this exact acquisition in Audit Mode, along with hotel, student housing, data center, condo and net lease models. Each one is fully built with five mistakes hidden in it. For the interview side, see NOI and cap rates.