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.

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