Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Question 2: Investment Analysis (40%) (A)Muneeba is considering investing in an apartment complex located in Sunninghill. The complex has 120 units, broken down as follows:

Question 2: Investment Analysis (40%) (A)Muneeba is considering investing in an apartment complex located in Sunninghill. The complex has 120 units, broken down as follows: Bedrooms Number Monthly Rent 1 20 R850 2 75 R1,050 3 25 R1,200 Currently, the market vacancy rate for similar apartment complexes is 7.5 percent. The prior owner's records show the following expenses annually: Salaries for on-site staff R85,000 Utilities R142,000 Maintenance & lawn care R128,000 Property management 10% of EGI Property taxes R230,000 Interest Payments ? Depreciation ? The asking price for this property is R6.7 million. Muneeba intends to hold the property for 3 years and sell it at the market value at the end of year 3. The exit cap rate is 11 per cent. Depreciation is straight line over 30 years. The required rate of return is 12%. Rent is increasing 3% yearly while expenses are set to rise 2% yearly for 5 years. Muneeba is able to secure financing for this property at a 70% LTV ratio from DBN mortgage bank at 7.25%, 25 year, fully amortized loan. *NOI should be used for estimating future values. Selling expenses is at 4%. Muneeba is in the 28 percent marginal tax bracket for ordinary income and capital gains will be taxed at 15 percent. (i) Write out the pro forma operating statement for this property to before tax cash flow. (9%) (ii) What is the before tax cash flow from operations for Year 1? (3%) (iii)What is the before tax reversion of the property at end of year 3? (9%) (iv)At what cap rate is the seller offering this property? (3%) (v) Provide two specific reasons why the cap rate may be a misleading indicator of a property's intrinsic value as an investment. That is, what factors might cause you to change your answer in part (iv) above? (6%) (vi)What is the NPV and IRR of equity of this investment for the 3 years holding period? assume before tax cash flow for year 2 is R200,000 and year 3 is R250,000 respectively.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Introduction To Finance Markets, Investments, And Financial Management

Authors: Ronald W. Melicher, Edgar A. Norton

17th Edition

1119561175, 978-1119561170

More Books

Students also viewed these Finance questions

Question

An improvement in the exchange of information in negotiations.

Answered: 1 week ago

Question

1. Effort is important.

Answered: 1 week ago