You are a recent college graduate and while you work in your area of expertise, you have recently started investing in real estate with a couple other like minded young professionals. One of your colleagues has identified a multi-family investment property in Detroit, MI listed at $365,000. These types of properties have been in high demand recently and your colleague recommends you jump on it with so few of these types of opportunities in the market. You begin your due diligence by visiting the subject property, collecting info on it, and collecting market data. Property Description / Income Info The subject property consists of a 20-Unit Residential Income Property with a mix of fifteen (15) OneBedroom Units, and five (5) Studio Units. According to the city of Detroit Assessment Records, the improvements were constructed in 1890. The first building is a three (3) level building with a full basement that encompasses approximately 7,540 square feet above grade. It has a 3,063 square feet basement. The exterior is brick. It has a pitched Asphalt Shingle Roof Cover. This building has a total of 16-units (11-one-bedroom units and five (5) studio units). It is considered to be in fair condition and has average utility. The second building is a two-story building that encompasses approximately 2,480 square feet of gross building area above grade and a full basement. According to the city of Detroit Assessment Records, this improvement was built in 1890. It has a wood sided exterior. The roof is pitched with an Asphalt Shingle Cover. This building has four (4) one-bedroom units. It is considered to be in fair condition and has average utility. This property is located on a 0.19-acre parcel with a land to building ratio just under one (1). The interior units feature carpeting, vinyl flooring, drywall and plaster throughout. The parcel is zoned R-1, Single Family Residential by the city of Detroit. The subject's use as a 20-Unit Residential Income Property is a legal nonconforming use. The subjects studio apartments rent for $323/month on average and the one-bedroom units rent for $481.67/month on average. Sales Comps Below is a summary of each comparable sale you were able to identify: Comparable #1 - This one story, 10-Unit residential apartment building was built in 1970, is in a similar location to the subject, and has long term tenants. It sold for $300,000 on 2/21/18. At the time of inspection, there was only one- vacancy and it was in average condition. All of the units are onebedroom, one-bathroom, a living room, and kitchen. The rents range from $475.00 up to $515.00 per month. The owner pays the heat and water. The average unit size is 583 sf. The land to building ratio is 3.4x and does not have a fully basement. Comparable #2 - This comparable represents the August 8, 2017 sale of two-multifamily two-story dwellings for a total of 11-units located in Detroit, MI. It was sold for $193,500 and is in a similar location to the subject property. The building, site, and basements sizes are combined. The property has a land to building ratio of 3.7x. They are both older wood framed structures with painted wood and/or aluminum sided exteriors, with full basements, built in the 1950's and/or 1960 and later converted from single family to multi-family. The buildings are in average condition. Comparable #3 - This comparable represents the May 5, 2017 sale of a two-story, two-unit (upper/lower) multi-family property for $51,870 in Detroit, MI. It is in a similar location as the subject property. The property is an older wood framed structure with vinyl sided exterior and a full basement that was built in 1880 and later converted from single family to multi-family use. It is in average condition. Lower one-bedroom unit rented for $600/per mo. The monthly rent for the upper twobedroom unit is estimated at $600/per month. Landlord pays utilities, insurance, taxes, water, sewer, trash, lawn, repairs, and maintenance. The land to building ratio is 2.5x. Comparable #4 - This comparable represents the March 2, 2017 sale of a two-story, three-unit multifamily property in Detroit, MI for $60,000. The comparable is in a similar location as the subject. The property is an older wood framed structure with a vinyl sided exterior that was built in 1900 and later converted from single family to multi-family use. It has a full basement and is in average condition. Reported monthly rents for the three-bedroom unit is $800, two-bedroom unit is $600, and $360 for the efficiency unit. Utilities are included in the rent up to $400 then tenants split any overage. Landlord pays utilities, insurance, taxes, water, sewer, lawn, repairs, and maintenance. The land to building ratio is 1.9x. Comparable #5 - This comparable represents the September 14, 2017 sale of a 16-Unit residential income property near the subject property in Detroit, MI for $210,000. The improvements were constructed circa 1877+/- as a single unit residential house on a full basement. Years later, it was converted into multi-family use. The improvement has three (3) stories. The exterior is brick, and the roof has an Asphalt Shingle Cover. It is considered to be in average/fair condition. The unit mix consists of five (5) one-bedroom units, 10-efficiency units, and one two-bedroom unit that is located in the basement. The property has a land to building ratio of 2.0x. Market Income Info After identifying the best comparable sales in the past year, you canvass the local market and identify several competing facilities to see whether the subjects rental rates are at levels supported in the market. Below are your findings: One-Bedroom Units are renting from a range of $425.00 to $550.00 per month with the utilities being included in the rent. Studio Units are renting from a range of $325.00 to $390.00 per month with the utilities being included in the rent. Based on a review of the rental rates for the comparable facilities, the majority of the current rental rates for the subject are within the range indicated by this comparable rental data. Based on the above analysis, you estimate a market rent of $500.00 per month for a one-bedroom unit and $375 per month for a studio unit. Reviewing market sales prices and their NOIs you determine the appropriate cap rate for comparable multifamily investment properties is 9%. Based on a review of market conditions a 10.00% vacancy and collection loss rate is appropriate and matches the subjects historical performance. Real estate taxes are property specific and you have contacted the local assessing office to confirm they are $6,203 per year. Insurance historically has been $3,200 per year. Based upon historical use utilities have been $24,000 per year. The property is older and typically requires repairs & maintenance of $21,250 per year. The previous owner also reports miscellaneous expenses of $2,000/year. Miscellaneous items include legal and accounting fees, etc. While not included in the subjects income statement, you know that any real estate investor must account for management fees (whether its paid to you the owner or a third party) and capital reserves (Reserves are funds set aside for the future replacement of the roof covering, floor coverings, HVAC Equipment, painting, etc). Based on your market research management fees are typically 5% (of EGI) and while the age and condition of the property would normally justify a higher reserve amount, because $21k/yr is already going towards repairs and maintenance, reserves are only being estimated at 5% (of EGI). Below is the income statement provided by the seller: Income Statement Rents: Rent from Studio Apts $14,880 Rent from 1BR Apts $80,700 Total Rents $95,580 Expenses: Taxes $6,203 Insurance $3,200 Utilities $24,000 Repairs/Maintenance $21,250 Misc/Other $2,000 Total Expenses $56,653 Net Operating Income $38,927 Instructions Below are the outlines for the three main items of this assignment, the Sales Comp approach, the Income approach, and a paper summarizing each and your final value recommendation to your partners and how to proceed. Spreadsheet o Complete Sales Approach ? Sales Price ? Price per Unit ? Adjust for: Location (+/- 5%) # of Units (+/- 5% if 5 units more/less than subject, 10% if 10 units more/less than subject) *hint comps with fewer units should be adjusted down Year Built (+/- 20% if more than 50 years) Land to Building Ratio (+/- 5% if greater than 1.5) Condition (+/- 0% if Fair, 5% Avg/Fair, and 10% if Average) No. of Stories ( -5% if less than 2 stories) Basement (+/- 5% if no basement) ? Adjusted Price per Unit ? Estimated Value o Complete Income Approach ? Potential Gross Income (lesser of actual or market) ? Vacancy & Collection Loss (market) ? Effective Gross Income ? Taxes (actual) ? Insurance (actual) ? Utilities (historical) ? Repairs/Maintenance (historical) ? Misc/Other (historical) ? Management (market) ? Reserves (market) ? Net Operating Income ? Cap Rate ? Estimated Value