An investor is considering an investment that has a Market Value of $2.5millions. The following information can be obtained:
Rent = $1,200 per unit per month. Rental Growth Rate = 3% per year compounded.
Number of units = 20
Vacancy rate is 12%.
Operating expenses = $125,000. Operating Expense Growth Rate = 3% per year compounded.
Loan-to-value ratio is 80%.
Interest rate on mortgage is 6%.
Maturity of mortgage = 15 years (with monthly payments).
Financing Costs = $30,000 amortized over life of the mortgage.
Depreciable basis = 75 percent of total cost
Depreciable life = 27.5 years (use 25% max for DEPR tax and 15% for CG tax)
Expected appreciation rate = 3% per year, compounded.
Anticipated Holding period = 5 years
The marginal tax rate of investor is 34%.
Expected Selling Expenses = 6%.
Required after-tax Return on Equity = 8%.
Calculate the NPV and IRR for the project on after-tax basis. (40%)
Calculate the following rules of thumb: Potential Gross Income Multiplier (PGIM); Capitalization Rate(R), Operating Expense Ratio (OER), Equity Dividend Rate (EDR); and Debt Coverage Ratio (DCR); and Brokers’ Rate of Return for the project. (15%)
Based on the results on (a) and (b), above, will you recommend this project to the equity investor (your client)? Why? How about if your client were to be a mortgage lender, will you still recommend this project to your lender client? Why? (7%)
How are property managers potentially able to enhance value? (3%)