The Returns to Single Family Rental Strategies

The Returns to Single Family Rental Strategies Andrew Demers and Andrea L. Eisfeldt January 2014

Homeownership Rates 70.0% 65.0% 60.0% Home Ownership Rate 55.0% 50.0% 45.0% 40.0% 1890 1895 1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Drew One dimension and Herbert of preference (2012) for homeownership that we are particularly interested in is homeownership. Tax advantages and the ability to borrow against equity to finance other consumption needs, which primarily benefit households in the shorter-run, are seen as less important reasons to own a home among respondents. Fannie Reasons to Buy a House Figure 3: Share of Respondents by Reasons to Own a Home Notes: Bars in orange are considered lifestyle reasons and bars in purple as financial reasons for buying a home. Reasons are listed in order of share of respondents selecting it as a major reason to buy.

Overview of Research Strategy Real investment strategy Traditional NPV Analysis But, over 1 yr with reasonable rental yields and HPA, IRR s apporoximately proportional to Total Returns Define annual total returns as Total Returns Net Rental Yield + HPA Start with an overview of total returns. Then, discuss total returns: 1. Nationally across MSA s 2. Within MSA s across zip codes

Across MSA Total Returns

R/P from Hedonic Model Median Characteristic Adjusted Rent/Price Ratio for Owner Occupied Housing 0.14 0.12 0.10 0.08 0.06 Los Angeles 4% 0.04 0.02 0.00 Atlantic City, NJ Las Vegas, NV Fort Myers Cape Coral, FL Erie, PA Akron, OH Beaumont Port Arthur, TX Lansing East Lansing, MI Evansville, IN KY Lakeland Winter Haven, FL Boulder Longmont, CO Houston, TX Atlanta, GA Lake County, IL Utica Rome, NY Grand Rapids, MI Cleveland, OH Columbus, OH New Orleans, LA Stockton, CA Detroit, MI Canton, OH Kansas City, MO KS Baton Rouge, LA Appleton Oshkosh Neenah, WI Peoria, IL Des Moines, IA Chicago, IL Minneapolis St. Paul, MN St. Louis, MO IL Lancaster, PA Tacoma, WA Austin, TX El Paso, TX Fresno, CA Colorado Springs, CO Pensacola, FL Vallejo Fairfield Napa, CA Tucson, AZ Davenport Rock Island Moline, IA IL Salt Lake City Ogden, UT Greenville Spartanburg, SC Salinas Seaside Monterey, CA Norfolk Virginia Beach Oxnard Ventura, CA Philadelphia, PA NJ Augusta, GA SC San Diego, CA Greensboro Winston Salem High Point, NC Bridgeport Milford, CT New Haven Meriden, CT Oklahoma City, OK Stamford, CT Anaheim Santa Ana (Orange County), CA Little Rock North Little Rock, AR Oakland, CA Johnson City Kingsport Bristol, TN VA Seattle, WA Raleigh Durham, NC Baltimore, MD New York City, NY San Jose, CA Santa Barbara Santa Maria Lompoc, CA Honolulu, HI Santa Rosa Petaluma, CA San Francisco, CA Mobile, AL

R/P within LA: Two Ways 9.00% Los Angeles R/P by Zip R/P sqft index R/P matched homes 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 90061 90044 91331 90744 90047 91402 91605 91342 90062 91345 91352 90043 91303 91335 90018 90248 91343 91306 91405 90032 91606 90016 91324 91311 91040 91406 91042 91304 90007 90710 91344 91325 90008 91307 90731 91601 91367 91326 91316 90732 90293 90094 91411 91401 90028 90025 90042 91364 91356 90024 90005 91602 90065 90067 91403 90038 90045 91423 90029 90041 91436 91604 90034 90019 90066 90077 90046 90039 90049 90026 90035 90068 90064 90272 90004 90027 90036

Cap Rates 11/13 Core Logic 7% 6% 5% 4% 3% 2% 1% 0% Fort Lauderdale, FL Tampa, FL Buffalo, NY Pittsburgh, PA Miami, FL Fort Worth, TX Houston, TX Greensboro, NC Atlanta, GA Charlotte, NC San Antonio, TX Las Vegas, NV Orlando, FL Cleveland, OH Nashville, TN Cincinnati, OH Indianapolis, IN St. Louis, MO Philadelphia, PA Dallas, TX New Orleans, LA Raleigh, NC Columbus, OH Riverside, CA Denver, CO Kansas City, MO Minneapolis, MN Detroit, MI Phoenix, AZ Norfolk, VA Newark, NJ Austin, TX Worcester, MA Baltimore, MD Salt Lake City, UT Milwaukee, WI Chicago, IL Boulder, CO Waterbury, CT Portland, OR Los Angeles, CA San Diego, CA Seattle, WA Washington, DC Boston, MA Oakland, CA Stamford, CT San Jose, CA San Francisco, CA New York, NY

14% HPA 2011-2013 Core Logic 12% 10% 8% 6% 4% 2% 0% Las Vegas, NV San Jose, CA Phoenix, AZ Oakland, CA San Francisco, CA Miami, FL Detroit, MI Riverside, CA Los Angeles, CA Worcester, MA Austin, TX Orlando, FL San Diego, CA Seattle, WA Salt Lake City, UT Boston, MA Houston, TX Tampa, FL Dallas, TX Portland, OR Denver, CO Fort Lauderdale, FL Fort Worth, TX Atlanta, GA Minneapolis, MN Kansas City, MO San Antonio, TX Boulder, CO New York, NY Washington, DC Chicago, IL Charlotte, NC Nashville, TN Pittsburgh, PA Milwaukee, WI Indianapolis, IN Columbus, OH Newark, NJ Baltimore, MD Cleveland, OH St. Louis, MO Raleigh, NC Buffalo, NY Greensboro, NC Norfolk, VA New Orleans, LA Stamford, CT Philadelphia, PA Waterbury, CT Cincinnati, OH

Total Return Historical HPA 12.0% 11.0% hpa (1993-2013) cap rate 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Miami, FL Fort Lauderdale, FL Tampa, FL Denver, CO Austin, TX Phoenix, AZ Houston, TX Boulder, CO New Orleans, LA Riverside, CA Portland, OR Minneapolis, MN Nashville, TN Worcester, MA Norfolk, VA Orlando, FL Salt Lake City, UT Fort Worth, TX Boston, MA San Jose, CA San Antonio, TX Las Vegas, NV Los Angeles, CA Philadelphia, PA San Diego, CA Newark, NJ Baltimore, MD Oakland, CA Charlotte, NC Pittsburgh, PA Dallas, TX New York, NY Kansas City, MO San Francisco, CA Seattle, WA Atlanta, GA Washington, DC St. Louis, MO Raleigh, NC Greensboro, NC Milwaukee, WI Columbus, OH Buffalo, NY Cincinnati, OH Detroit, MI Chicago, IL Indianapolis, IN Cleveland, OH Stamford, CT Waterbury, CT

Total Return Recent HPA 18% hpa (2011-2013) cap rate 16% 14% 12% 10% 8% 6% 4% 2% 0% Las Vegas, NV Phoenix, AZ Miami, FL San Jose, CA Oakland, CA Detroit, MI Riverside, CA San Francisco, CA Worcester, MA Orlando, FL Tampa, FL Los Angeles, CA Houston, TX Fort Lauderdale, FL Austin, TX Dallas, TX Salt Lake City, UT Fort Worth, TX Denver, CO San Diego, CA Atlanta, GA Seattle, WA Boston, MA Portland, OR Minneapolis, MN San Antonio, TX Kansas City, MO Charlotte, NC Nashville, TN Pittsburgh, PA Boulder, CO Chicago, IL Indianapolis, IN Washington, DC Columbus, OH Buffalo, NY Cleveland, OH Milwaukee, WI St. Louis, MO Newark, NJ Raleigh, NC New York, NY Greensboro, NC Baltimore, MD New Orleans, LA Philadelphia, PA Norfolk, VA Cincinnati, OH Waterbury, CT Stamford, CT

Total Return Forecast HPA 14% hpa (2013-2018 forecast) cap rate 12% 10% 8% 6% 4% 2% 0% Fort Lauderdale, FL Riverside, CA San Jose, CA Miami, FL Oakland, CA Tampa, FL San Francisco, CA San Diego, CA Los Angeles, CA Orlando, FL Pittsburgh, PA Cleveland, OH Worcester, MA Las Vegas, NV Salt Lake City, UT Phoenix, AZ Cincinnati, OH Stamford, CT Seattle, WA Waterbury, CT Denver, CO Fort Worth, TX Indianapolis, IN Portland, OR Minneapolis, MN Atlanta, GA Columbus, OH Raleigh, NC Norfolk, VA San Antonio, TX Dallas, TX Philadelphia, PA Newark, NJ Greensboro, NC Boston, MA St. Louis, MO Charlotte, NC Boulder, CO Buffalo, NY Nashville, TN Houston, TX Kansas City, MO Chicago, IL Milwaukee, WI Baltimore, MD Washington, DC New Orleans, LA Detroit, MI Austin, TX New York, NY

Total Levered Return 3(HPA + Cap Rate)- 2(Financing) 3x hpa (2013-2018 forecast)+3x cap rate-2x5.5% financing 35% 30% 25% 20% 15% 10% 5% 0% Fort Lauderdale, FL Riverside, CA San Jose, CA Miami, FL Oakland, CA Tampa, FL San Francisco, CA San Diego, CA Los Angeles, CA Orlando, FL Pittsburgh, PA Cleveland, OH Worcester, MA Las Vegas, NV Salt Lake City, UT Phoenix, AZ Cincinnati, OH Stamford, CT Seattle, WA Waterbury, CT Denver, CO Fort Worth, TX Indianapolis, IN Portland, OR Minneapolis, MN Atlanta, GA Columbus, OH Raleigh, NC Norfolk, VA San Antonio, TX Dallas, TX Philadelphia, PA Newark, NJ Greensboro, NC Boston, MA St. Louis, MO Charlotte, NC Boulder, CO Buffalo, NY Nashville, TN Houston, TX Kansas City, MO Chicago, IL Milwaukee, WI Baltimore, MD Washington, DC New Orleans, LA Detroit, MI Austin, TX New York, NY

HPA is Key to Total Returns Preview: HPA Model Two Stage Error Correction 1. Stage 1: Predict trend of house prices using income, supply inelasticity, and user cost inputs. 2. Stage 2: Predict deviation from trend using measures of disequilibrium. Long run HPA based on fundamentals in stage 1, while Short run HPA also depends on disequilibrium in stage 2.

6 Income Growth is key to HPA Only Top of Distribution is Growing United States-Bottom 90% average income-including capital gains United States-Top 5-1% average income-including capital gains United States-Top 0.5-0.1% average income-including capital gains United States-Top 10-5% average income-including capital gains United States-Top 1-0.5% average income-including capital gains United States-Top 0.1-0.01% average income-including capital gains 5 4 3 2 1 Current threshold top 1% = $393,941 Current threshold top 5% = $161,438 Current threshold top 10% = $113,820 0 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

100% 90% Income Growth is key to HPA Poor constrained, rich unconstrained. % of Income on Housing 1991 2011 80% 70% 60% 50% 40% 30% 20% 10% 0% 1 2 3 4 5

Income Growth is key to HPA Zips with the top 10% 60% %zip > $113,820 as of 2010 50% 40% 30% 20% 10% 0% Stamford, CT Washington, DC San Francisco, CA Oakland, CA San Jose, CA Newark, NJ Boston, MA New York, NY Baltimore, MD Austin, TX Boulder, CO Philadelphia, PA Chicago, IL Houston, TX San Diego, CA Los Angeles, CA Miami, FL Seattle, WA Fort Worth, TX Dallas, TX Kansas City, MO Phoenix, AZ San Antonio, TX Denver, CO Minneapolis, MN Detroit, MI Fort Lauderdale, FL Worcester, MA Indianapolis, IN St. Louis, MO Nashville, TN Milwaukee, WI Charlotte, NC Columbus, OH Cleveland, OH Portland, OR Pittsburgh, PA Atlanta, GA Buffalo, NY Cincinnati, OH Greensboro, NC Las Vegas, NV New Orleans, LA Norfolk, VA Orlando, FL Raleigh, NC Riverside, CA Salt Lake City, UT Tampa, FL Waterbury, CT

Income Growth is key to HPA 09:44 Tuesday, January 14, 2014 1 0.06 Miami, FL HPA (1993-2013) vs. Fraction of zips > $113,820 median income in 2011 dollars San Jose, CA New York, NY San Francisco, CA Boston, MA 0.05 Portland, OR Boulder, CO Austin, TX Denver, CO San Diego, CA Los Angeles, CA Phoenix, AZ Oakland, CA Seattle, WA Worcester, MA Washington, DC Fort Lauderdale, FL hpa_15a 0.04 Minneapolis, MN Houston, TX Nashville, TN Baltimore, MD Newark, NJ Stamford, CT Milwaukee, WI San Antonio, TX Philadelphia, PA 0.03 Kansas City, MO Dallas, TX Fort Worth, TX Charlotte, NC Chicago, IL St. Louis, MO Pittsburgh, PA Atlanta, GA Detroit, MI Columbus, OH 0.02 Indianapolis, IN Cleveland, OH 0.0 0.1 0.2 0.3 0.4 0.5 frac_top

County Elasticity of Housing Supply Supply Elasticity is key to HPA

Supply Elasticity is key to HPA 09:44 Tuesday, January 14, 2014 1 Log Inverse Housing Supply Elasticity vs. HPA (1993-2013) 0.06 San Jose, CA New York, NY San Francisco, CA Miami, FL Boston, MA Boulder, CO Portland, OR 0.05 Oakland, CA Austin, TX Denver, CO San Diego, CA Phoenix, AZ Seattle, WA Los Angeles, CA Washington, DC Salt Lake City, UT hpa_15a 0.04 Houston, TX Nashville, TN Minneapolis, MN Baltimore, MD Newark, NJ Worcester, MA Fort Lauderdale, FL Norfolk, VA Riverside, CA New Orleans, LA Tampa, FL Stamford, CT Kansas City, MO San Antonio, TX Fort Worth, TX Dallas, TX Philadelphia, PA Orlando, FL Las Vegas, NV Milwaukee, WI 0.03 Charlotte, NC Chicago, IL St. Louis, MO Raleigh, NC Pittsburgh, PA Atlanta, GA Columbus, OH Detroit, MI Greensboro, NC 0.02 Indianapolis, IN Cincinnati, OH Waterbury, CT Buffalo, NY Cleveland, OH -1.5-1.0-0.5 0.0 0.5 log_inv_elasticity

15% Poor Man s Error Correction Term: Relative to Boom Peak Distance from Pre-2009 Peak 5% -5% Houston, TX Austin, TX Dallas, TX Pittsburgh, PA Fort Worth, TX Boulder, CO Buffalo, NY Denver, CO San Jose, CA New York, NY San Francisco, CA San Antonio, TX Boston, MA Nashville, TN Raleigh, NC Columbus, OH Kansas City, MO Charlotte, NC New Orleans, LA Indianapolis, IN Greensboro, NC Worcester, MA Cincinnati, OH St. Louis, MO Milwaukee, WI Salt Lake City, UT Philadelphia, PA Portland, OR Atlanta, GA Seattle, WA Norfolk, VA Chicago, IL Cleveland, OH Baltimore, MD Minneapolis, MN Washington, DC Los Angeles, CA Newark, NJ Oakland, CA San Diego, CA Stamford, CT Detroit, MI Waterbury, CT Miami, FL Phoenix, AZ Tampa, FL Fort Lauderdale, FL Riverside, CA Orlando, FL Las Vegas, NV -15% -25% -35% -45%

Within MSA Total Returns

Within LA Cap Rates 11/13 Core Logic 0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00% 4.50% 5.00% 5.50% 6.00% 6.50% 93534 93552 90011 93551 90260 91605 91331 91321 91744 90745 90606 90638 91307 91405 90065 90706 91042 90660 90603 91790 90802 91010 90241 90504 90808 91367 91505 90601 91316 90026 90230 91501 91423 91302 90278 90039 90254 91356 90814 91775 90404 90027 91006 90004 90292 90035 90048 90049

Within LA Recent HPA (avg. 2012-2013) -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% 91775 91606 90723 90804 91792 91016 90706 91306 90069 90277 90011 91750 91604 90504 90035 91325 91402 90254 90027 91351 91101 90274 91732 91746 91436 90805 90045 91381 90745 90016 90638 91302 91104 91301 91384 91042 91202 90043 90746 90803 91335 91006 91326 91011 90292 91706 90064 91350

Within LA Total Return 11/13 Cap, avg. 2012-2013 HPA 35% 30% 25% 20% 15% 10% 5% 0% -5% 91775 91606 90004 93550 91792 90026 91352 91405 91345 91340 90230 91601 90606 90604 91604 91765 90280 90293 90814 91101 91107 91206 90805 90403 91770 90291 90745 90813 90016 91367 90713 90201 91803 90650 91767 91042 91791 91202 91745 91335 91010 90802 91307 91304 91342 90292 91024 90024-10% -15%

Within LA Total Leveraged Return 11/13 Cap, avg. 2012-2013 HPA 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% 91775 91606 90004 93550 91792 90026 91352 91405 91345 91340 90230 91601 90606 90604 91604 91765 90280 90293 90814 91101 91107 91206 90805 90403 91770 90291 90745 90813 90016 91367 90713 90201 91803 90650 91767 91042 91791 91202 91745 91335 91010 90802 91307 91304 91342 90292 91024 90024-20% -30% -40% -50%

Explaining HPA within MSA s HPA within MSA s is very disperse and can be very large. Ways to understand within MSA HPA: 1. Gentrification: Assignment model based on income growth and income distribution, house quality distribution. Van Nieuwerburgh Weill, Hurst Hartley Guerierri 2. Housing CAPM : Compensation for MSA and Nationwide HPA factors. 3. Subprime/financing effects: Seem large for 2003-2007. Landvoight Piazzesi Scheider

Unlevered IRR s

ProFormas Carried Inputs from Year 1 Assumptions Assumptions Years out 0 1 2 3 4 5 6 7 8 9 10 Assumptions Capital Invested $ 520,473 Revenue Gross Rent $ 47,817 $ 49,251 $ 50,729 $ 52,251 $ 53,818 $ 55,433 $ 57,096 $ 58,809 $ 60,573 $ 62,390 3.00% Gross yield (=R/(initial purchase price+renovations) ratio) 9.2% 9.5% 9.7% 10.0% 10.3% 10.7% 11.0% 11.3% 11.6% 12.0% Vacancy and Credit Loss $ (1,546.40) $ (1,593) $ (1,641) $ (1,690) $ (1,740) $ (1,793) $ (1,846) $ (1,902) $ (1,959) $ (2,018) 3.23% Effective Gross Rent $ 46,271 $ 47,659 $ 49,088 $ 50,561 $ 52,078 $ 53,640 $ 55,249 $ 56,907 $ 58,614 $ 60,373 Expenses Property Mgmt and Leasing $ (3,730) $ (3,842) $ (3,957) $ (4,076) $ (4,198) $ (4,324) $ (4,453) $ (4,587) $ (4,725) $ (4,866) 7.80% Non Revenue Linked Expenses $ (17,176) $ (17,519) $ (17,869) $ (18,227) $ (18,591) $ (18,963) $ (19,343) $ (19,729) $ (20,124) $ (20,526) 2.00% Total Expenses $ (20,905) $ (21,361) $ (21,826) $ (22,302) $ (22,789) $ (23,287) $ (23,796) $ (24,316) $ (24,849) $ (25,393) Net operating income $25,365 $26,298 $27,262 $28,259 $29,289 $30,353 $31,453 $32,590 $33,765 $34,980 NOI yield 4.9% 5.1% 5.2% 5.4% 5.6% 5.8% 6.0% 6.3% 6.5% 6.7% NOI margin 53.0% 53.4% 53.7% 54.1% 54.4% 54.8% 55.1% 55.4% 55.7% 56.1% Cap Ex $ (5,205) $ (5,309) $ (5,415) $ (5,523) $ (5,634) $ (5,746) $ (5,861) $ (5,979) $ (6,098) $ (6,220) 2.00% Free Cash Flow $ 20,160 $ 20,989 $ 21,847 $ 22,735 $ 23,655 $ 24,607 $ 25,592 $ 26,612 $ 27,667 $ 28,760 FCF yield (economic) 3.9% 4.0% 4.2% 4.4% 4.5% 4.7% 4.9% 5.1% 5.3% 5.5% FCF margin (economic) 42.2% 42.6% 43.1% 43.5% 44.0% 44.4% 44.8% 45.3% 45.7% 46.1% Home Value $ 520,473 $ 546,496 $ 568,356 $ 588,249 $ 605,896 $ 624,073 $ 642,795 $ 662,079 $ 681,941 $ 702,400 $ 723,472 HPA 5.0% 4.0% 3.5% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% Total Return on Investment 8.9% 8.0% 7.7% 7.4% 7.5% 7.7% 7.9% 8.1% 8.3% 8.5% Total cash flows each date 10 year investment horizon $ (520,473) $ 20,160 $ 20,989 $ 21,847 $ 22,735 $ 23,655 $ 24,607 $ 25,592 $ 26,612 $ 27,667 $ 752,231 Total cash flows each date 5 year investment horizon $ (520,473) $ 20,160 $ 20,989 $ 21,847 $ 22,735 $ 647,728 10 year 5 year Unlevered IRR: 7.6% 8.2% NPV @ IRR (Set this to zero by changing unlevered IRR) (11,736) (14,204)

ProForma Assumptions Assumptions Assumptions or Implied Percentages House Characteristics Bedrooms 3 Bathrooms 2 Square Feet 1,438 For calculations per square foot. Implied by Trulia average price 3BR/average price per square foot Price per square foot $353.00 From Trulia for 3BR homes Capital Investment Purchase Price $ 507,500.00 From Trulia for 3BR homes Renovation Paint $ 1,725.21 $1.20 Cost per square foot Floor $ 2,012.75 $1.40 Cost per square foot Appliances $ 4,000.00 Assume directly (assume a value conditional on price range) Landscaping $ 2,000.00 Assume directly (assume a value conditional on price range) Cleaning $ 359.42 $0.25 Cost per square foot General Repairs $ 2,875.35 $2.00 Cost per square foot Total Renovation $ 12,972.73 2.6% Implied percentage renovation cost/purchase price Total Invested Capital $ 520,472.73 Baseline First Year Income and Expesnses Revenue Assume a gross yield. This is like R/P except it is R/(purchase price+renovations)=r/capital Invested. Use PR Gross Rent $ 47,816.91 9.19% ratio from our hedonic model since those properties are in "good shape". Vacancy $ (1,195.42) 2.5% Percentage of gross rent ( Vacancy rate of 10% once every 4 years) Credit Loss $ (350.98) 0.7340% Percentage of gross rent Effective Gross Rent $ 46,270.51 96.77% Implied percentage effective gross rent Expenses Property Management $ 2,821.20 5.900% Percentage of gross rent Leasing Fees $ 908.52 1.900% Percentage of gross rent Property Taxes $ 6,505.91 1.250% Percentage of capital investment HOA Fees $ 1,951.77 0.375% Percentage of capital investment Insurance $ 1,951.77 0.375% Percentage of capital investment Repairs and Maintenance $ 3,122.84 0.600% Percentage of capital investment Turnover Costs $ 3,643.31 0.700% Percentage of capital investment Total Expenses $ 20,905.32 4.017% Implied percentage total expenses/capital investment Annual Capex $ (5,204.73) 1.00% CapEx in addition to maintenance and repairs. Net Operating Income $ 25,365.19 Free Cash Flow $ 20,160.47

IRR Comparative Statics 0.25 0.2 0.15 IRR 0.1 0.05 0 0.14 0.12 0.1 0.08 0.06 Gross Rental Yield 0.04 0.02 0.02 0.04 0.06 HPA 0.08 0.1 0.12 0.14

Expense Assumptions Renovation Morgan Stanley Deutsche Bank Five Ten Fed White Paper costs per square foot imply 8.8% of purchase price EXPENSE ASSUMPTIONS 8.70% none none Vacancy 2.5% of gross rent 5.4% of gross rent 5.60% one month per year =1/12 of gross rent Credit Loss.73% of gross rent none none none Property Management 5.9% of gross rent 5.7% of gross rent 4 8% of gross rent or $1000/year 8% of gross rent Leasing Fee 1.9% of gross rent none 75% of gross rent initial, 25% one month's rent=1/12 of rollover gross rent Property Taxes 1.25% of initial investment 16.7% of gross rent, includes insurance 1.5% 2% of property value none HOA Fees 0.375% of initial investment none none none Insurance 0.375% of initial investment rolled in with taxes $750 2000/year depending on hazards, construction none costs Repairs and Maintenance 0.6% of initial investment 15.5% of gross rent $1500 2000/year 2% of property value Turnover costs 0.7% of initial investment none $1000 every 3 years none Additional annual capex 1.15% of initial investment none none none

Core Logic Cap Rate Formula Inputs