1a:

You are contemplating development of single-family houses on an acre of land you already own. The land can be subdivided into 1, , or acre lots. 1-acre lot houses are typically 4,000 SF and cost $350,000 to construct. Houses on acre lots are 3,000 SF and cost $ 225,000 to build and acre houses are 2,000 SF and cost $175,000. Subdivision costs (legal, infrastructure etc.) are $40,000 per lot. A 4,000 SF house will sell for $500,000, a 3,000 SF house will sell for $350,000 and a 2,000 SF house will sell for $250,000.

What should you do?

1b:

Suppose a 15,000 SF building you are considering purchasing is generating gross rents of $300,000 per year with no expense reimbursement. Operating expenses are $100,000 per year and vacancy loss is 5% of gross rent. You feel you need to carry capital reserves and leasing commissions @2% of gross rent. You can buy the building for $2,000,000 and finance 70% of the purchase price @ 8% interest and 30-year amortization (0.0881 loan constant). Replacement costs for similar buildings are $125 per square foot and vacancy rates are 7%.

Determine your NOI, CFO, FC, ROA and ROE. What should you do? Why? What else should you worry about?