25 Jul WHAT IMPACT WOULD THESE CHANGES HAVE ON THE ECONOMICS?
This lab will help you understand the economic anal Show more Real Estate Investment Analysis: This lab will help you understand the economic analysis that you should be aware of when buying real estate for investment purposes. Investment Opportunity Base Case: You have an opportunity to buy a four family apartment house in Boynton Florida for $1060000 with the following: Building Costs: $710000 (Depreciable capital in Input sheet) Land Costs: $350000 (Non-depreciable capital in Input sheet) MARR: 10% (Input sheet) Cap Rate 8% minimum (Investor) 11% maximum (Seller) Project Life: 20 Years (Input sheet) Income tax rate: 30% (Input sheet) It is projected that both land and building will appreciate at the rate of 8% per year. (Cap & Depr sheet) Rental Income: 2 units at $2500 /month for each unit 2 units at $2000 /month for each unit (Income sheet) This rent is expected to increase 8% per year (inflation rate). (Income sheet) It is expected that the apartments will be occupied 95% time. (Income sheet) Assumption: Owner pays all the expenses except gas electricity and phone for apartments. Monthlyexpenses are as follows: (All expenses go on the Expenses sheet) Insurance $270 Management Fees $100 Utilities: Water / Sewage $150 Property Taxes $900 Utilities: Gas / Heat * $30 Trash Removal $70 Utilities: Electricity * $30 Repairs $200 Commissions 0 Other $100 Professional Fees $70 * denotes the utility expenses for common areas. These expenses are expected to increase 5% per year (inflation rate). (Expenses sheet) Working Capital: 3 months of year 1-5 average expenses and mortgage payments. (Expenses sheet. The Working capital is automatically calculated by the model after all the inputs on the mortgage sheet have been made) Assumption: It is assumed that the working capital is repaid in year 20. Financing is as follows: (Mortgage sheet) Debt/Equity Ratio: 70% Annual Interest: 6% Loan Period: 20 years Notice that in Year 0 you are the investor whereas in Year 20 you will be the seller. Note: Enter your last name as Property Name on Input sheet. Complete the following table: question 1 as YOU ARE THE BUYER; (questions 2 9) assuming now that YOU ARE THE SELLER of the property looking at the situation in YEAR 20. Remember in Yr. 20 you will be THE SELLER; therefore you want as LOW a cap rate as possible. Please adjust the projected annual building and land appreciation rate if project is rejected due to Cap Rate. Figures of Merit Decision Figures of Merit Decision Figures of Merit Decision Figures of Merit Decision Grades Grades Q NPV IRR Cap Rate (EOY 0) Accept or Reject Max Q AS BUYER Min: Positive Min: 10% MIN: 8 Max 1 Base Case Input all Values 3 1 Accept/Reject 3 keep all inputs the same except keep all inputs the same except keep all inputs the same except keep all inputs the same except keep all inputs the same except keep all inputs the same except keep all inputs the same except keep all inputs the same except NPV IRR Cap Rate (EOY 20) Accept or Reject AS SELLER Min: Positive Min: 10% Max: 11 2 Rent Growth Rate Use 7% 3 2 Accept/Reject 3 3 Expense Growth Rate Use 7% 3 3 Accept/Reject 3 4 Land/Building Growth Rate Use 3% 3 4 Accept/Reject 3 5 Mortgage Rate Use 9% 3 5 Accept/Reject 3 6 Occupancy Rate Use 70% 3 6 Accept/Reject 3 7 Debt/ Equity Ratio Use 50% 3 7 Accept/Reject 3 8 Best Case Analysis Growth rates for: Rent: 15% Expense: 4%;Building/Land: 9%; Mortgage Rate: 6%; Occupancy Rate: 95%; Debt/Equity Ratio: 90% 3 8 Accept/Reject 3 9 Worst Case Analysis Growth rates for: Rent: 5% Expense: 10%; Building/Land: 4%; Mortgage Rate: 9%; Occupancy Rate: 70%; Debt/Equity Ratio: 50% 3 9 Accept/Reject 3 10. What is the most sensitive factor in the overall economics? Use the following table to make your decision. [6 points] Ref: (Prev. Ques.) Parameter Change Parameter Change Parameter Change FOM change (NPV) FOM change (NPV) FOM change (NPV) Sen. Ratio Rank* Ref: (Prev. Ques.) Before After % change in parameter Before After % change in NPV Sen. Ratio Rank* A B C=(B- A)/A D E F=(E D)/D |F/C| 2 Rental Income Growth 3 Expense Growth 4 Land/ Building Appreciation 5 Mortgage Rate 6 Occupancy Rate 7 Debt/Equity Ratio * Rank: Most sensitive is the largest number = 1; Least sensitive = 6 11. Assuming you found a building in need of repair (handymans special) in a good neighborhood: [3 points] a) What would you need to do to make this investment viable? b) What impact would these changes have on the economics? (Give examples) ___________________________________________________________________________________________________________________________________________________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ 12. Assuming you found a building in good condition in a bad neighborhood: [4 points] a) What would you need to do to make this investment viable? b) What impact would these changes have on the economics? (Give examples) ____________________________________________________________________________________________________________________________________________________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ Check over your answers and make sure all questions are answered completely. Ensure that you write your name in this document. Show less
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