1. What will be the building’s annual net profit and cash flow if Mohebbi uses the 8 percent mortgage?

2. What will be the building’s annual net profit and cash flow if Mohebbi uses the 9 percent mortgage?

3. Should the investment be made using either of the mortgages if Mohebbi does sell the property after ten years for $1,478,000 (i.e., what is the rate of return on the investment)?

4. How would the answers differ if

a) The occupancy rate were to fall to 80 percent?

b) Operating costs are initially 25 percent of the cost of the building and rise to 30 percent after five years?

c) The anticipated price at which the apartments will be sold after ten years is its book value of $850,000?

5. What are the unsystematic and systematic risks associated with this investment?

6. If the correlation coefficient relating returns on investments in apartments to returns on investments in common stock is 20.1, what impact will the investment have on Mohebbi’s total risk?

Mike Mohebbi is a sophisticated investor with assets in excess of $2.5 million. Mohebbi believes he has sufficient funds invested in equities and is considering acquiring a moderate-size apartment complex with ten units. Rents are currently $1,000 per unit per month and each unit is rented. The asking price is $1.1 million; however, Mohebbi believes he can acquire the property for less. But, after lawyers’ fees, title search and title insurance, inspection fees, and other costs, the total cash outlay will be $1.1 million ($100,000 for the land and $1 million for the building).