THE FOLLOWING 5 QUESTIONS CONCERN THE FOLLOWING SITUATION Yo

THE FOLLOWING 5 QUESTIONS CONCERN THE FOLLOWING SITUATION: 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 & out, and fixing up apartments between tenants, you have a typical vacancy rate of 5%. Your starting average rent per unit is $12,000 on the typical 1-year lease. You calculate that the operating expenses you will pay on the property will average $5000 (per occupied unit) per year. Both rents and expenses are expected to grow in-line with inflation at arn average of 2%. (a) What is the projected effective gross rental revenues or Effective Gross IncomeLEGI) for the property in the first year? (b) What is the projected net operating income (NOI) for the property in the first year? (c) If your hurdle rate of return (or Opportunity Cost of Capital (OCC) or Discount Rate (DR)) on your development of 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? (d) Suppose you bought the land for $750,000 and your construction costs (hard & soft) totaled $5,500,000 what do you calculate your approximate profit amount on your project will be? (e) What do you calculate your rate of return on your project to be?

Solution

(a) Projected effective Grosss rental revenue in the first year

= $12000*100*(1-0.05)

= $1140000

(b) Projected net operating income in the first year

=  Projected Grosss rental revenue - Operating Expenses of Occupied units

= $1140000 - $5000*100*(1-0.05)

= $1140000 - $475000

= $665000

(c) Approximate Estimations of Property\'s Worth Considering perpetuity

= Net Opraration Income * (1+ Inflation rate)/ Hurdle rate of return

= $ 665000 * (1+0.02) / 11%

= $6166363.64

(d) Approximate profit amount on Project

= Property\'s worth - Land Cost - Construction costs

= $6166363.64 - $750000 - $5500000

= - $ 83636.36

(e) rate of return on project

= Approximate profit amount on Project / Total Project Cost * 100

=  - $ 83636.36 / $6250000 * 100

= - 1.34%