Abstract
The next three chapters of the book will elaborate on characteristics specific to the “four food groups” of investment property as was defined in Chap. 1. Chap. 8 will discuss multi-family (or residential apartment) projects, Chap. 9 will discuss retail and office properties, and Chap. 10 will discuss the various types of industrial and warehouse properties. Each chapter will conclude with case studies with corresponding answer keys located on the Springer website.
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Francis Bacon
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References
Americans with Disabilities website, http://www.access-board.gov/adaag/html/adaag.htm?bcsi_scan_2EC956E02D10C4E6=MMHU2QPoN9O6AvTKdpgK1WnsvWsVAAAAKumeFw==&bcsi_scan_filename=adaag.htm#4.9. Accessed 25 March 2011.
Financial Times, Flested, Andrea (2010). Supermarkets: Tesco finds thriving market and launch pad for China 10 Nov 2010, Financial Times web edition, at http://www.ft.com/cms/s/0/c0ab4740-eb8a-11df-bbb5-00144feab49a.html#axzz1LyVcvPId. Accessed 10 May 2011.
Phyrr, S. S., & Cooper, J. R. (1982). Real estate investment: Strategy, analysis, decisions. New York: Wiley.
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Appendices
Mini-Case: Property Manager Interviews for Off-Campus Student Housing
8.1.1 Off-Campus Student Housing Occupancy Study
Student Name _____________________________________
Date of Study _____________________________________
Name of Housing Complex _______________________________________
Address (street, city) ____________________________________________
Property Manager Contact ________________________________________
Property Management Company ___________________________________
Age of Complex (Year constructed & last major renovation*) ____________
Number of Floors in Complex ____________
Number of Buildings in Complex ____________
Type of Construction (brick, etc.) __________________________________
Total Number of Units in Complex _________________________________
Total Number of Bedrooms per Unit ________________________________
Total Number of Bathrooms per Unit _______________________________
Total Square Footage per Unit _____________________________________
Current Occupancy _____%
Occupancy Rates for the last 3 years ____% _____% _____%
Number of new units added over same period ________________________
Rent per Student per month $________
Rent per unit per month $________
Any expenses paid by landlord? ________________
If yes above, what and for how much monthly? ________________________
List amenities in complex ________________________________________
Washer/Dryer Units or Laundry Room? _____________________________
Any additional comments*: _______________________________________
______________________________________________________________
______________________________________________________________
*If major renovations have been undertaken within last 5 years, please describe in the section above or on additional pages. Additionally, please itemize any other concerns or observations that you feel are important and relevant to the class as related to the subject property.
Names of other complexes considered comparable by Property Manager:
Apartment Case Study #1
Mr. & Mrs. Robbins have recently sold their Ace Hardware business, and want to invest $150,000.00 to buy a small apartment complex. The Robbins’ will operate the day-to-day management of the apartment complex. This represents the couple’s first foray into investment real estate.
Some specifics of the apartment complex are as follows:
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The apartments were built in 1989 (it looks its age)
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There are two 8 unit buildings
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All units are two bedroom/two bathroom and are 1,000 square feet
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The property has no amenities
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The apartments are located in a small to medium sized town. There are no anticipated changes to the base employment in the town, and no material changes in economic growth are projected.
The investors’ market research reveals the following:
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Current rents are $675.00 per month per unit and these rents are within the market averages.
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Hundred competing units will be available in 30 days. There are currently 75 additional units in the market. Both of these properties have amenities including swimming pools, tennis courts, and a fitness center.
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Current occupancy is 100%, though vacancy has fluctuated up to 10%.
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The market vacancy is 7% for apartments.
Total acquisition costs for this property are $800,000.00. Mr. & Mrs. Robbins will invest $150,000.00 in personal equity, and are seeking financing from a financial institution for a loan for the remainder.
Historical operating expenses are:
Taxes | $17,595 |
Insurance | $1,102 |
Repairs and maintenance | $1,749 |
Utilities | $1,260 |
Other expenses | $7,162 |
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1.
Determine the net operating income for this property using the direct capitalization spreadsheet.
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2.
Determine the first year debt service coverage ratio for a loan of $650,000.00, at an interest rate of 8%, for 20 years.
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3.
Using a cap rate of 9%, what is the estimated value for this property?
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4.
Determine the breakeven occupancy rate and interest rate for this property.
Apartment Case Study #2
Overlook, LLC was formed to purchase Overlook Apartments. The purchase price is $2,500,000.00. The investors would like to finance as much of the purchase price as is supported by the net operating income of the property. The apartments were built in 1997 and are in good condition. The investors have provided you with a rent roll for the subject property, as well as the income and expense statements from the most recent 2 years for the subject property. Market vacancy is stable at 10%, and the location of the complex is considered good based on your recent tour of the property and the surrounding market. The investor’s equity into this purchase is coming from the personal savings of Mr. and Mrs. Ernest Smith. The investors have requested financing of 90% of the purchase price, but traditional bank guidelines allow for financing of only up to 80% for this type of property. The investors have supplied a copy of the most recent rent roll as follows. The current occupancy in the apartments is 95%.
# of units | Layout | Sq. ft. | Rent rate | Tenant history |
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24 | 1 Bed and 1.5 Bath | 800 | $650 | Avg. occupancy is 3 years |
24 | 2 Bed and 2 Bath | 980 | $700 | Avg. occupancy is 4 years |
The most recent 2 years profit and loss statements for the subject property are summarized below:
Prior year | Most recent | |
---|---|---|
Gross rents | $375,000 | $385,000 |
Expenses | ||
Advertising | $4,000 | $5,000 |
Cleaning and maintenance | $6,000 | $8,000 |
Insurance | $7,500 | $8,000 |
Repairs | $15,000 | $14,000 |
Taxes | $37,000 | $40,000 |
Utilities | $2,300 | $2,450 |
Depreciation | $15,000 | $26,000 |
Landscaping | $3,000 | $3,000 |
Total expenses | $89,800 | $106,450 |
Net income | $285,200 | $278,550 |
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1.
Determine the net operating income for this property using a direct capitalization spreadsheet.
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2.
Determine the first year debt service coverage ratio for a loan equal to 80% and 90% of the purchase price, at an interest rate of 8%, for 20 years.
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3.
Using a cap rate of 9.50%, what is the estimated value for this property? What does the loan to estimated value look like at 80% of purchase price? What about at 90% of purchase price?
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4.
Determine the breakeven occupancy rate and interest rate for this property at both loan amounts.
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5.
Under what circumstances would you consider financing over 80% (and moving outside of the typical financing guidelines for your bank)?
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6.
Calculate a Discounted Cash Flow for this property. Assume that your direct cap numbers represent year 1, and project a 2.5% increase in income and expenses over the holding period of 10 years. Assume further that the property will appreciate 3% annually, with 1% selling expenses. Further assume that management expenses will be 5% of EGI and that replacement reserves will be $100 per unit each year. Discount the NOI at 9%, and find the BTIRR for the 80% loan case. Is there a material difference in value between the direct cap and the DCF in this case? Why is there (or when might there be) a material difference?
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Goddard, G.J., Marcum, B. (2012). Investing in Residential Apartment Projects. In: Real Estate Investment. Springer Texts in Business and Economics. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-23527-6_8
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