Part 1 - Unlevered 4203 Ravenswood Trail is a two-story, three-unit building in a desirable urban neighborhood near a large university campus that you are entertaining purchasing and holding as a long-term investment. It is currently listed for $350,000 or $116,667 per unit. The first floor contains a 2BR/1BA unit rented for $1,275 per month. The second floor contains two 1BR/1BA units. The front unit has a private balcony and is rented for $1,100 per month, and the other unit is rented for $1,050 per month. The seller's representative provided you with historical income data suggesting that the seller has collected about $35 per month from each tenant in the form of late fees, pet fees, and laundry income. The property also has a detached garage accessible from the alley that one of the tenants currently rents for an additional $60 per month. A local property manager you met at the wedding of a mutual friend who manages several buildings in this neighborhood told you that the rentals rates at the building appear reasonable and that vacancy rates have historically hovered around 3.00% with some seasonable variability around the beginning and end of the fall semester. Historically, rents have increased by about 5% per year, while other income tends to remain flat, increasing maybe 1% per year. As a back-of-the-envelope measure, operating expenses in this market typically run at about 35% of effective gross income."

1a. What is the EGI in year 1?

1b. What effective gross income multiplier does this imply based on the list price for the property?

1c. What is the NOI in year 1?

1d. What cap rate does that imply based on the list price for the property?

1e. What is the gross income multiplier implied by the list price?

1f. Assuming you hold this investment for five years and you anticipate you can sell the property at a capitalization rate of 8.00% based on pro-forma income, how much do you expect to sell the property for?

1g. If closing costs are typically about 5% of the sale price for a seller, what are your expected net proceeds from the sale at the end of year five?

1h. If your investment criteria dictate that the property needs to generate a target yield of 9.50% per year, what is the maximum you could pay for this property while still meeting that objective?

1i. Would you purchase this property at its current list price?

1j. What is your projected internal rate of return (IRR), assuming you purchase the property for its list price?