Question
Part 1 You are considering the purchase of a 120-unit apartment complex. The 50 one-bedroom units rent for $650 per month and the remaining 70
Part 1
You are considering the purchase of a 120-unit apartment complex. The 50 one-bedroom units rent for $650 per month and the remaining 70 two-bedroom units rent for $800 per month. Vacancy and credit losses are 10% in this market. There is miscellaneous income of $20,000 per year. Operating expenses for this property are 35% of gross operating income. Market cap rates for this type of investment are 7.75%. You can get a loan equal to 75% of the purchase price at 7.00% interest with a 30-year amortization term. The minimum debt coverage ratio is 1.25.
- What is the NOI?
- What is the Purchase Price (do not round)?
- How much is the loan amount?
- How much is the annual debt service?
- What is the cash on cash?
- Calculate the debt coverage ratio?
Part 2
Now assume a different scenario: this is a value-add opportunity and you plan to hold the property for 3 years. You are considering using an interest only loan at 6.825% fixed for 5 years with an 75% loan to value. You can become more efficient with the operations and bring those down immediately in the first year by 2.5% by getting your management team in there. In addition, you expect that you can reduce the vacancy and credit loss to 7.5% in the second year and 5% in the third year. You also assume that rents increase at a modest 2.0% annually, beginning immediately, and that the miscellaneous income remains flat. When you sell the property at the end of Year 3, you expect cap rates to be a little higher at 8.0%. Commissions and closing costs are 4.5% and 0.5%, respectively.
- How much equity is required?
- What is the DCR in each year?
- What is the Cash On Cash in each year?
- What is the total investment IRR?
- What is the total profit from the investment?
Cash on Cash = Cash flow before taxes / equity investment
This measure is unique to a particular investor with particular financing. It takes operating expenses and financing into consideration. An investor could compare the cash-on-cash from a motel to an apartment complex as part of their investment decision.
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