You plan to purchase an office building for $1.2 million, selling it at the end of year 5 at a cap rate of 9%. Selling cost will be $30,000 at the end of year 5.

Over the next year, its 5 suites will rent for $4,000 per month per suite.

Assume vacancy and collection losses of 11%. Miscellaneous income is $2,000 per year, while operating expenses and capex together are 40% of EGI plus a fixed component of $35,000. The miscellaneous income, fixed costs, OE-ratio, and V&L-ratio will not change YoY.

A 25-year amortization, 5-year mortgage can be obtained for 5% at a wide range of LTVs, with no fees.

Your RE market analysis suggests the following outcomes for PGI growth over the next 6 years: -3% (10% probability), -1% (20%), 1% (40%), 4% (20%), and 6% (10%).

If the rf rate is 1%, what are the Sharpe ratios for an unlevered investment and an investment at 75% LTV? Which alternative is better assuming equity capital opportunity cost is not a concern?

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