Assume that you are an investment analyst preparing an analysis of an investment opportunity for a client. Your client is considering the acquisition of an apartment complex from a developer at the point in time when the apartments are ready for first occupancy. You have developed the following information.
Number of units = 36
First year market rent per unit = $450 per month
Rent is projected to increase by 8% each year
Annual vacancy rate = 3% of PGI
Annual collection loss = 2% of PGI
Annual operating expense = 35% of EGI
Miscellaneous yearly income (parking and washers/dryers) = $800
Monthly miscellaneous income is expected to remain constant
Purchase price = $2,000,000
Estimated value of land = $500,000
Anticipated mortgage terms:
Loan to value ratio = .80
Interest rate = 6%
Years to maturity = 25
Points charged = 3
Prepayment penalty = 2% of outstanding balance f) Level payment, fully amortized
Fixed interest rate, annual payments
Anticipated holding period = 4 years
Proportion by which property is expected to appreciate during the holding period — 5% a year
Estimated selling expenses as proportion of future sales price = 5%
Marginal income tax rate for the client = 28%
It is assumed that the property is put into service on January 1st and sold on December 31st
Assume the client is “active” in the property management
It is assumed that the client has an adjusted gross income of $95,000 and has no other passive income not offset by other passive losses (for each year of the anticipated holding period)
Client’s minimum required after tax rate of return on equity = 11%
A. The before-tax and after-tax cash flows for each year of the holding period and the before-tax and after-tax equity reversion.
B. The after-tax net present value and the after-tax internal rate of return.
C. Is this an investment that should be considered? Explain.
D. For the first year of operation the calculate, Equity dividend rate, gross income multiplier, Debt-coverage ratio, overall (cap) rate of return.