Real Estate Investment Analysis Homework Help Homework Help

Real Estate Investment Analysis
Homework Help

Executive Summary

The subject is a 100 unit property, which is located near Doral southeast of the I-75/Turnpike Interchange. The units of the property include 20 one-bedrooms, one-bath units and 60 two-bedrooms, two-bath units and 20 three-bedrooms and two bath units. All of these units had been completed last year and they are leased at the moment. All of the currently required amenities are provided by the apartment complex. These amenities include Air Conditioning, Alarm System, Broadband Internet Access, Cable or Satellite, Carpet, Ceiling Fan, Dishwasher, Extra Storage, Garbage Disposal, Internet Access etc. This property is around 94% occupied currently. The property is in a good conditionoverall. This report performs the financial analysis for the subject property and three different scenarios have been generated using excel spreadsheet to analyze the sensitivity of the NOI and expenses and determine the

Real Estate Investment Analysis Homework Help

Real Estate Investment Analysis Homework Help

relative changes in the investor returns and the value of the property. The base case, worst case and the best case scenarios have been created using the assumptions provided in the case. Since the high and low levels for each assumption variable have been provided therefore, these two have been used as the assumptions for the worst case and best case scenarios. The average of these two rates is used for the base case scenario. The LTV for the base case is assumed to be 75%, 65% for worst and 85% for best case scenarios. The results of the analysis showed that the property would yield BTIRR and ATIRR of 10.73% and 6.41% respectively, for the base case scenario. The worst case scenario showed even worse conditions. The best case scenario showed that the property is favorable. However, given the huge sensitivities involved, this is a risky market and investment should not be made in this property.

Pictures & Visuals

Front Photo

Front Photo

Map

Map

Clubhouse and Pool

Clubhouse and Pool

Side View

Side View

Market Preview

            Much has happened in the Apartment world since December of 2014 and the metros among the apartments in Florida have achieved the highest rental growth. The job market is also growing significantly. The Bay area department markets of Florida have held around three of the top four spots on the list of Axiometrics for achieving the highest annual rental growth based on the number of the units among the top 50 metros in the area. Along with this, the South Florida metros such as West Palm Beach, Fort Lauderdale and Miami have held three positions among the top 13. The tourism industry is also picking up in Florida during the past two years and also due to the improvement in the economy.

The occupancy rates in Orlando and Miami have been highest in the region and the South Florida has been seen as a strong apartment market. The Tampa and Orlando metros have achieved growth rates of around 5% to 7% in 2016, however, the only metro which has achieved a double digit growth rate is the Sacramento metro. But the South Florida rental market is back in action and the rental would see a strong growth over the next few months. The speed of new construction is continuing to accelerate in Florida especially in the Suburb locations such as Broward County.

This is because of the deepening of the pool of the renters and the rapid growth of the population. New employment opportunities are also being created and the demand for the home ownership is declining. Competition would be from medium to high. This is because it has been projected by the national real estate brokerage Marcus and Millichap that around 10,200 new apartments would come to the market as compared to only 8700 in the year 2015. This is a huge increase of around 17%. However, still the South Florida market forecasts based on the Real Capital Analytics and the Costar Group analysis show that the apartment owners in this region would cover higher average rents than their counterparts in Miami-Dade this year. The average rental in the region is between $1300 and $2300 per month.

Marketability

The name of the property is Sterling Crest, which is located near Doral southeast of the I-75/Turnpike Interchange. This is a one hundred unit apartment complex and the units include 20 one-bedroom, one-bath units and 60 two-bedroom, two-bath units and 20 three bedroom two bath units. The units were completed last year and are leased at this moment. The complex also has most of the required amenities. The apartment includes spacious walk in closets, designer kitchens, dryer and the full size washer. The apartment also offers a swimming pool, clubhouse, spa, fitness center along with the play room for the children. This home apartment complex has been designed to outclass trend and time. The amenities of the apartment include:

  • Air Conditioning
  • Alarm System
  • Broadband Internet Access
  • Cable or Satellite
  • Carpet
  • Ceiling Fan
  • Dishwasher
  • Extra Storage
  • Garbage Disposal
  • Internet Access
  • Walk In Closets
  • Washer Dryer Hookup
  • Window Covering

            The median income in the area has been around $61,900, which could be considered as favorable if we compare it with the monthly rental rates of the commercial apartment. The apartment has been completed with all the furnishing last year worth $600,000 and it also included the exterior paint and landscaping. This is not an old apartment complex and it offers all the modern day amenities which are provided in the modern apartment complexes. However, the size of the property is small therefore, the large real estate investment firms do not seem to be interested in purchasing this kind of a property and thus, the smaller local investors are more interested in this 100 unit property. On an average this property is stabilized at an occupancy rate of more than 94%. Moreover, the upside in rents and the growth of the population in this region of Florida both make this property highly profitable. Finally, this property could also be converted into Condos in future years if the commercial market heats up.

Rent Comparables

            The rent comparables of the above property are as follows:

Rent Comparables

Rent Comparables

            If we look at the average of the rent comparable figures in the above table, then we can see that our Florida Garden Apartment would compete well with all of the direct competitors based on the cap rates and the occupancy rates. Moreover, the unit size is also bigger for our property.

Sales Comparables

The sales comparables of the above property are as follows:

Sales Comparables
Address Units Avg Size Big Size Land Area Sale Date Sale Price Price/SF Price/Unit Cap rate
USA - Florida, Collier County, Naples 90 836 75240 5989 1/12/2008 $7,000,000 $8,373.21 $93.04 8.71%
Brickell, Miami-Dade County, Florida 88 988 86944 - 4/5/2012 3,200,000 $3,238.87 $36.81 9.90%
Florida, South County, Naples 77 995 76615 3116 22/4/2010 6,553,000 $6,585.93 $85.53 8.75%
715 Alba Dr 100 880 88000 6/4/2010 8200000 $9,318.18 $93.18 6.70%
Averages   924.75       6238250 6879.05 77.1386 8.52%

The listing price of the property is not mentioned in the case however, it seems that the price of the property would be higher than the identified sales comparables. All of the properties are comparable to our property in terms of the location and quality. However, the most comparable is the last or the fourth property, which had 100 units and was sold for $8.2 million.

Analysis with Assumption Support

            The information and all the assumptions about the real estate market variables such as capitalization rates, occupancy rates, expense growth, rent growth and the vacancy rates have been provided in the property scenario. The key assumptions which were used in this report included a range of different variables such as vacancy, credit loss, management fees, rent growth, expense growth, exit cap rate, initial cap rate and LTV which is the leverage.

Vacancy & Credit Loss: The vacancy and credit loss rates have been provided for the best and worst case scenarios, which are 7.5% and 5% respectively. An average rate of 6.25% has been used for the base case scenario.

Management Fee: The management fee is 4% of the effective gross income and as it does not change so often therefore, it remains same for all the three scenarios.

Rent Growth: The rents have fluctuated between 1% and 6% for the last few years. Therefore, 1% is used for worst case scenario, 6% for best case and an average rate of 3.5% has been used for the base case scenario.

Expense Growth: The expenses have been growing between 2% and 5% therefore, 2% has been used for best case, 5% for worst case and an average of 3.5% has been used for the base case scenario.

Interest Rate:The market rate for permanent mortgages at the market for this type of project is with a range of 4% to 4.75% with a maximum 30-year term. It is not difficultto place this type of permanent loan even though the size of the complex is small. Therefore, 4% has been used for best case, 4.75% for worst case and average of 4.38% for the base case scenario.

Selling Costs:The typical fees associated with property sales in the market are between 2.5% and 5.0% of the sales price including the disposition fee you firm charges. 2.5% is used for best case, 5% for worst case and average of 3.25% for base case.

Leverage: The LTV of 75% has been used for the base case scenario however, for the worst and best cases, we have used 65% and 85% LTV ratios.

Reserves: The rents have fluctuated between $100 and $225 for the last few years. Therefore, $225 is used for worst case scenario, $100 for best case and an average of $163 has been used for the base case scenario.

Going in Cap Rate: The high and low cap rates from historical figures are provided in the case, therefore, 7.5%% is used for worst case scenario, 6% for best case and an average rate of 6.75% has been used for the base case scenario.

Exit Cap Rate: A single exit cap rate of 8.5% has been provided which has been used in the base case. For the worst and the best case we have increased and decreased this exit cap by 0.5% respectively.

Hurdle Rates: The BT required returns and AT required return have assumed on the basis of prospective returns and alternative investments. These rates are 15% and 12% respectively.

Tables

            Three key scenarios have been considered to perform a sensitivity analysis for the proposed property. These three scenarios are the base case, worst case and the best case scenarios. The assumptions have been used as stated above for each of these three key scenarios. The sensitivity of ATIRR, BTIRR, ATNPV and BTNPV would provide insights regarding the riskiness and the real value of the property.

Summary of Assumptions Table

  Base Case Worst Case Best Case
Property Basics
VacCredit 6.25% 7.50% 5.00%
Mgtfee 4.00% 4.00% 4.00%
Other income 0.00% 0.00% 0.00%
Rental growth rate 3.50% 1.00% 6.00%
Expense growth rate 3.50% 5.00% 2.00%
Expense ratio (initial) . . .
Loan terms
Loan to value ratio 75.00% 75.00% 75.00%
Loan amount 3,945,363 4,457,105 4,226,371
Amortization in years 30 30 30
Annual interest rate 4.38% 4.75% 4.00%
Monthly payment ($42,442.02) ($42,442.02) ($42,442.02)
Acquisition
Cap rate (initial) 6.75% 7.50% 6.00%
Acquisition price 5,260,483 5,942,807 5,635,161
Depreciable base rate 80% 80% 80%
Depreciable base 4,208,387 4,754,246 4,508,129
Cap rate (at sale) 8.50% 9.00% 8.00%
Sales expense 3.75% 5.00% 2.50%
Dep period 27.5 27.5 27.5
Tax implications
Marginal t rate 36.00% 36.00% 36.00%
Capital Gains rate 20.00% 20.00% 20.00%
Return requirements
BT required return 15.00% 15.00% 15.00%
AT required return 12.00% 12.00% 12.00%
Expenses
Units number 700 120000 211140
Op Exp per unit $2,050 $2,400 $1,700
Taxes per unit $775 $800 $750
Reserves per unit $163 $225 $100

Returns for Base Case Analysis

Returns
Investment cash flows
BTCF -2,833,519 255,746 282,523 310,236 338,920 368,608 3,128,595
ATCF -2,833,519 231,906 246,790 262,174 278,073 294,505 2,537,570
BTIRR 10.73%
BTNPV (463,897)
ATIRR 6.41%
ATNPV (613,667)
 
Debt coverage ratio 1.50 1.55 1.61 1.67 1.72 1.78

Returns for Worst Case Analysis

Returns
Investment cash flows
BTCF -2,833,519 -84,572 -69,707 -54,321 -38,396 -21,915 -1,578,027
ATCF -2,833,519 -111,810 26,695 34,242 42,021 50,040 -1,102,671
BTIRR N/A
BTNPV (3,710,558)
ATIRR 22.14%
ATNPV (3,391,244)
 
Debt coverage ratio 0.83 0.86 0.89 0.92 0.96 0.99

Returns for Best Case Analysis

Returns
Investment cash flows
BTCF -2,833,519 592,752 631,324 671,246 712,565 755,330 8,335,617
ATCF -2,833,519 321,678 475,355 498,604 522,636 547,476 6,699,532
BTIRR 34.83%
BTNPV 2,987,305
ATIRR 26.23%
ATNPV 2,224,529
 
Debt coverage ratio 2.16 2.24 2.32 2.40 2.48 2.57


Variance Analysis

            The base case IRRs before and after tax for the proposed property are 10.73% and 6.41% however, they do not achieve the target hurdle rates and thus, the value of the property is not good as it is based on the realistic market conditions. Based on this scenario, it is not recommended to purchase this property because not only the required returns are low, but the price for the property is also lower as compared to the other historical properties which have been sold.

            The best case scenario shows the BTIRR and ATIRR rates of around 34.83% and 26.23% and these are also based on the realistic assumptions of the market variables. The price of the property according to this scenario is $3.37 million before tax and $2.37 million after tax, which is still lower than the historical comparable sales. Finally, the worst case scenario shows the negative values for the IRR before tax and the before tax value of the property. The after tax IRR is 22.14% and NPV after tax is $0.057 million. This indicates that even on nominal dollar terms all of the equity has not been returned, thus, under the worst case assumptions, the property should not be purchased which is quite obvious. Therefore, based upon the overall investment and looking at the sensitivity analysis performed for the property assumptions, this property is a high risk property and does not achieve the target rates of return.

Recommendation

            Based upon the best case scenario, the property should be purchased for a final price of $2.372 million after tax. The best case scenario is also probable and thus, it shows realistic value of the property, however if we consider the base case and the worst case scenarios, then we see that the risk in this property is high. The investors might not be able to achieve their target BTIRR and ATIRR of 15% and 12% respectively. If any of the assumptions change in the market, then the investment could generate a loss for the investor. It is important to note that the base case scenario itself could not achieve the target rates of return, which shows that this property is a high risk property and that the investor should not invest in this property.

Exhibits

Exhibit 1: Base Case Model Operating Cash Flow

Year Year Year Year Year Year
1 2 3 4 5 6
Potential Gross Rent Number Initial rent
1/1 Units 20 700 168,000 173,880 179,966 186,265 192,784 199,531
2/2 units 60 975 702,000 726,570 752,000 778,320 805,561 833,756
3/2 units 20 1300 312,000 322,920 334,222 345,920 358,027 370,558
Total 1,182,000 1,223,370 1,266,188 1,310,505 1,356,372 1,403,845
 Less: Vac&Credit 73,875 76,461 79,137 81,907 84,773 87,740
 
 Plus: Other income 0 0 0 0 0 0
Effective Gross Income 1,108,125 1,146,909 1,187,051 1,228,598 1,271,599 1,316,105
Less: Operating Expenses
 Management Fee 44,325 45,876 47,482 49,144 50,864 52,644
 Operating Expenses 205,000 212,175 219,601 227,287 235,242 243,476
 Taxes 77,500 80,213 83,020 85,926 88,933 92,046
 Reserves 16,250 16,819 17,407 18,017 18,647 19,300
 All other 0 0 0 0 0 0
Total Expenses 343,075 355,083 367,511 380,373 393,686 407,465
Net operating Income 765,050 791,827 819,541 848,225 877,912 908,639
Less: Interest 369,110 362,852 356,315 349,486 342,352 334,899
Depreciation 329,719 329,719 329,719 329,719 329,719 329,719
Taxable income 66,221 99,256 133,507 169,020 205,842 244,021
Times: Marginal tax rate 36% 36% 36% 36% 36% 36%
Income tax 23,840 35,732 48,063 60,847 74,103 87,848
BTCF     255,746 282,523 310,236 338,920 368,608 399,335
*** *** *** *** *** ***
ATCF     231,906 246,790 262,174 278,073 294,505 311,487
Property Cap Rate 6.75%
Property Value $1,286,403

Exhibit 2: Worst Case Model Operating Cash Flow

Year Year Year Year Year Year
1 2 3 4 5 6
Potential Gross Rent Number Initial rent
1/1 Units 20 500 120,000 124,200 128,547 133,046 137,703 142,522
2/2 units 60 700 504,000 521,640 539,897 558,794 578,352 598,594
3/2 units 20 1000 240,000 248,400 257,094 266,092 275,406 285,045
Total 864,000 894,240 925,538 957,932 991,460 #######
 Less: Vac&Credit 64,800 67,068 69,415 71,845 74,359 76,962
 
 Plus: Other income 0 0 0 0 0 0
Effective Gross Income 799,200 827,172 856,123 886,087 917,100 949,199
Less: Operating Expenses
 Management Fee 31,968 33,087 34,245 35,443 36,684 37,968
 Operating Expenses 240,000 248,400 257,094 266,092 275,406 285,045
 Taxes 80,000 82,800 85,698 88,697 91,802 95,015
 Reserves 22,500 23,288 24,103 24,946 25,819 26,723
 All other 0 0 0 0 0 0
Total Expenses 374,468 387,574 401,139 415,179 429,711 444,751
Net operating Income 424,732 439,598 454,984 470,908 487,390 504,448
Less: Interest 19,354 377,662 371,271 364,570 357,544 350,176
Depreciation 329,719 329,719 329,719 329,719 329,719 329,719
Taxable income 75,660 -267,783 -246,006 -223,381 -199,872 -175,446
Times: Marginal tax rate 36% 36% 36% 36% 36% 36%
Income tax 27,237 -96,402 -88,562 -80,417 -71,954 -63,161
BTCF     -84,572 -69,707 -54,321 -38,396 -21,915 -4,856
*** *** *** *** *** ***
ATCF     -111,810 26,695 34,242 42,021 50,040 58,305
Property Cap Rate 7.50%
Property Value $50,754


Exhibit 3: Best Case Model Operating Cash Flow

Year Year Year Year Year Year
1 2 3 4 5 6
Potential Gross Rent Number Initial rent
1/1 Units 20 850 204,000 211,140 218,530 226,178 234,095 242,288
2/2 units 60 1250 900,000 931,500 964,103 997,846 1,032,771 1,068,918
3/2 units 20 1600 384,000 397,440 411,350 425,748 440,649 456,072
Total 1,488,000 1,540,080 1,593,983 1,649,772 1,707,514 1,767,277
 Less: Vac&Credit 74,400 77,004 79,699 82,489 85,376 88,364
 
 Plus: Other income 0 0 0 0 0 0
Effective Gross Income 1,413,600 1,463,076 1,514,284 1,567,284 1,622,139 1,678,913
Less: Operating Expenses
 Management Fee 56,544 58,523 60,571 62,691 64,886 67,157
 Operating Expenses 170,000 175,950 182,108 188,482 195,079 201,907
 Taxes 75,000 77,625 80,342 83,154 86,064 89,076
 Reserves 10,000 10,350 10,712 11,087 11,475 11,877
 All other 0 0 0 0 0 0
Total Expenses 311,544 322,448 333,734 345,414 357,504 370,017
Net operating Income 1,102,056 1,140,628 1,180,550 1,221,869 1,264,635 1,308,897
Less: Interest 19,354 377,662 371,271 364,570 357,544 350,176
Depreciation 329,719 329,719 329,719 329,719 329,719 329,719
Taxable income 752,984 433,247 479,560 527,580 577,372 629,002
Times: Marginal tax rate 36% 36% 36% 36% 36% 36%

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