REAL ESTATE INVESTMENT ANALYSIS Case Solution
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
Â Â Â Â Â Â Â Â Â Â Â 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.
Â Â Â Â Â Â Â Â Â Â Â 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……………………
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