Dean is looking to invest in real estate. He wants to find a property that will provide solid cash flow over the next 5 years. He has found 2 different properties.

Mortgage interest rates are at 4.5% and his lender is willing to give him an amount equal 80% of the value of the real estate. Dean will need to provide the rest. The loan term will be for 30 years, but Dean wants to sell after 5 years and use the proceeds to pay off the mortgage.

Despite being in two different states, both properties are in the "DMV" area (Delaware, Maryland, Virginia) that is built around the Beltway of Washington DC. The market is in high demand with many government workers, contractors and consultants. Occupancies tend to be at least 95% and new developments lease up quickly and typically reach 95% within the first 12 months of opening. With the market being very hot, expenses usually increase 3% every year.

Property 1 "Green Gardens" a 100 unit apartment complex located in Montgomery County Maryland. The property had been completed in 2009 and had been operating at 95% occupancy since it opened. The asking price is $21 million, but the broker believes that it could be had for $20 Million. 50 1 bedroom units rented for $1,800 per month and 50 2 bedroom units rented for $2,500 per month. Additionally, parking is $100 per month but there are only 25 spots and they are always leased. Property Management is 5% of EGI and RE Taxes are 12% of GPI. All other operating expenses are 10% of EGI

Property 2 "Ivy Terrace" a 75 unit apartment complex located in Arlington, Virgina. The property has just been completed and the broker believes that it will start at 10% occupancy and grow to 95% by the end of year 2. The asking price is $11 million. 50 1 bedroom units rented for $2,000 per month and 25 2 bedroom units rented for $3,000 per month. Property Management is 5% of EGI and RE Taxes are 15% of GPI. All other operating expenses are 12% of EGI.

1) Which of these two would you advise dean to buy?

2) What is the cash on cash return (net income divided by cash invested) of the property you are recommending ?

3) The historical average yearly return of the S&P 500 is 9.74%over the last 20 years. Assuming Dean took the same cash he used to get into this investment, to invest in the S&P 500 for 5 years (using 9.74% return each year) would he have been better off in terms of return on investment?

4) Would you have invested in one of the two Real Estate investments or just put your money in the S&P 500 over that 5 year period? Why?

5) BONUS: If Dean is in the 37% tax Bracket - what is his after tax return?