This Multifamily Development Offering Is Targeting A 22.8% IRR - Are These Returns Realistic?

EquityMultiple has an active listing for Lee's Summit Development, a build-for-rent, master-planned community of townhomes and villas in Lee's Summit, Missouri. The community will be named The Montage at Lee's Summit, and EquityMultiple has a head-turning target net internal rate of return (IRR) of 22.8%. Is this realistic? Let's dig in.

Offering Snapshot:

• Property Type: Townhomes
• Investment Type: Equity
• Target Closing: January
• Target Hold Period: 36 Months
• Minimum Investment: $15,000
• Projected Returns:
  • IRR: 22.8%
  • Multiple: 2.0x
  • Cash-on-Cash (average): 7.6%
• Hypothetical Return on $100,000 investment:
  • Year 0: ($100,000)
  • Year 1: $0
  • Year 2: $0
  • Year 3: $19,096
  • Year 4: $180,691 (anticipated exit)

The Montage at Lee's Summit

The Montage at Lee's Summit will be a 226-unit community with "miles of trails, water features, shaded gathering spaces, firepits, pickleball courts, a dog park, clubhouse, fitness facility, and a resort-style pool," according to the Investor Packet. Lee's Summit features all the top attributes we look for in a real estate market – a great location, a growing population, rising employment with low unemployment, rising average household income, growing rents, and a low vacancy rate.

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Location

Lee's Summit is one of 17 suburbs in the Kansas City Metropolitan Statistical Area (MSA), located 16 miles southeast of Kansas City. Lee's Summit is the 6th largest city in Missouri and offers a desirable suburban lifestyle with good schools, parks, and community amenities, which has continued to attract families.

Population

Lee's Summit has been one of the fastest-growing suburbs in Missouri over the past decades. In 1960, its population was just 8,267 compared with an estimated 104,638 today.

The Kansas City/Lee's Summit population is projected to grow by over 30% by 2040, adding as many as 38,000 new residents, according to the Investor Packet.

Employment

Employment in the Kansas City MSA grew by 2.3% in the fourth quarter of 2023 compared with the same time a year ago for a gain of about 25,000 jobs in total, according to the Investor Packet. 

Major employers in the area outside of the public school system and the local and federal government include HCA Midwest Health System, University of Kansas Hospital, Saint Luke's Health System, Ford Motor Company F, T-Mobile TMUS, and Cerner, which was acquired by Oracle ORCL.

Income

According to Census data, the median household income in Lee's Summit is approximately $89,140, about 20% higher than the Kansas City MSA and about 1.4 times higher than the state average.

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According to Census data, the median household income in the Portland-Vancouver-Hillsboro MSA is approximately $84k, about 20% higher than the national median of about $70k. It has shown steady growth over the last decade, including a robust 14.1% increase from 2013 to 2018. 

Rent Growth

Over the last 12 months, asking rents increased by about 5% in Lee's Summit to about $1,288 per month, which exceeds the MSA average of $1,172 per month, according to the Investor Packet. REIS is forecasting asking rents to increase approximately 3.9% per annum through 2024 and 2025, reaching an average of $1,471 per unit per month.

Vacancy Rate

The vacancy rate in Lee's Summit was about 6.2% as of July 2023, 2.9% higher than its long-term average and 1% higher than the Kansas City MSA average, according to the investor packet. However, REIS is forecasting long-run vacancy to decrease to about 5.7% by 2024 and 4.7% by 2025.

Is a 22.8% IRR realistic?

While a 22.8% IRR may seem overly optimistic at first glance, a review of the supporting information reveals that The Montage at Lee's Summit could very well achieve an IRR north of 20%. Click here to learn more.

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