You are considering the purchase of an apartment complex. The following assumptions are made:

• Purchase price $1 million

• Potential gross income for year 1 is $171,000 with 4% increases per year projected.

• No vacancies are expected

• Operating expenses including CAPX are estimated at 35% of effective gross income

• The market value of the investment is expected to increase 4% per year

• Selling expenses will be 4%

• The holding period will be 4 years

• The appropriate unlevered return rate of return to discount projected NOIs and the projected net selling price (NSP) is 12%.

• The required levered rate of return is 14%.

• 70% of the acquisition price can be borrowed with a 30-year, monthly payment mortgage.

• The interest rate on the mortgage is 8% per year

• Financing costs equal 2% of the loan amount

• There are no prepayment penalties on the loan

Calculate the IRR of this investment assuming no mortgage debt. Should you purchase? Why or why not?

Helpful calculations:

Item PGI Less: V&C EGI Less: OE NOI Year 1 $171,000 0 171,000 59,850 $111,150 Year 2 $177,840 0 177,840 62,244 $115,596 Year 3 $184,954 0 184,954 64,734 $120,220 Year 4 $192,352 0 192,352 67,323 $125,029 Item Selling price [1,000,000 x (1.04)*] less: Selling expenses (at 4% of SP) Net Selling price Amount $1,169,859 46,794 $1,123,065 Item Initial Outflow Yr. O NOI Yr.1 NOI Yr.2 NOI Yr.3 NOI Yr.4 Reversion Yr. 4 Net Present Value Cash Flow -$1,000,000 111,150 115,596 120,220 125,029 1,123,065 Present Value at 12% -$1,000,000 99,241 92,152 85,570 79,458 713,727 $70,150