You intend to develop a rental apartment building that has 100 units. It is in a good market and you will immediately fill it up, though with people moving in and out, and fixing up apartments between tenants, you have a typical vacancy rate of 5%. Your starting average rent per unit is $12,000/year on the typical 1-year lease. You calculate that the operating expenses you will pay on the property will average $5,000 (per occupied unit) per year. Both rents and expenses are expected to grow in-line with inflation at an average of 2%.

What is the projected Effective Gross Income (EGI) for the property in the first year?

What is the projected net operating income (NOI) for the property in the first year?

If your hurdle rate of return, or Opportunity Cost of Capital (OCC), or Discount Rate (DR) on this type of project is 11%, what do you calculate to be an approximate estimation of what the property is worth, given your operating results in the first year?

Suppose you bought the land for $750,000 and your construction costs (hard and soft) totaled $5,500,000 what do you calculate your approximate profit amount on your project will be?

What do you calculate your rate of return on your project to be?

After you have built the apartment project (in the previous problem), the markets get stronger and your rental rates grow by 3% for both Year 2 and Year 3. However, then there is a slightly weaker economy and your rental rate growth is just 2% for Year 4 through Year 7. But, as with all cycles, the demand picks up after a few years, and you have strong growth of 4% for Year 8 through Year 10, with Year 11 expected to be the same 4%. On the other hand, you manage the property well and your Operating Expenses (per occupied unit) just continue to grow at a stable 2% per year. To get a clear picture of your project, you do a ProForma of the NOI over these 10 years.

In Year 10, with things looking so good, you decide to sell the property at the end of that year. The markets are indicating a Cap Rate of 8%.

What would be your selling price?

Taking your 10 year Proforma, what would you now more precisely calculate the Valuation of the project to be back in Year 1, compared with how you valued it earlier on that Year 1 NOI?

What would be the Net Present Value of the project in Year 1

What would be the IRR of the project?

How does this IRR compare with your earlier Rate of Return calculated on Year 1 NOI? Why is this?