Question

upon a time the following add appeared in the Athens newspaper- For Sale: Apartment Building 30 Units Average Rent for 2019 is expected to be $600 per month per unit 2 years old Price Upon investigation you found that it would require little or no work on your part. There was a rental agency which would keep the books, rent apartments, do evictions and other administrative tasks for 10% of the rent. Your investigation showed that the apartments stayed about 95% occupied and that occupancy rate is likely to continue. Additionally, the rental agency told you that you can expect rents to increase about 5% per year after 2019 year for the following three years (2020, 2021, and 2022) because the building is new. The repairs and maintenance costs are about $800 per month for 2019, 2020, 2021and 2022. After that, you expect these to rise at 5% per year. You want to earn at least 20% on your investment. You figure you will hold on to the apartment for four years and then sell it for $800,000 (on Dec 31, 2022). All other cash expenses run $1,000 per month and will rise at 5% per year after 2019. Assume it is Jan 1, 2019- what is the price you would pay for the apartment? Ignore taxes.

Answer 1

Particulars	2019	2020	2021	2022
No. of units (A)	30	30	30	30
Rent per unit (5% increase each year) (B)	$7,200	$7,560	$7,938	$8,335
Total Rent (C = A * B)	$216,000	$226,800	$238,140	$250,047
Occupancy Rate (D)	95%	95%	95%	95%
Rent Income (E = C * D)	$205,200	$215,460	$226,233	$237,545
Rental Agency Charge (F = 10% of C)	$20,520	$21,546	$22,623	$23,754
Net Rent Income (G = E - F)	$184,680	$193,914	$203,610	$213,791
Repair & Maintenance Cost (H)	$9,600	$9,600	$9,600	$9,600
Other Cash Expense (I) (5% increase each year)	$12,000	$12,600	$13,230	$13,891
Net Income (J = G - H - I)	$163,080	$171,714	$180,780	$190,300

Now we will discount the net income for the future years at the required rate of return of 20%

NPV = (163,080/1.2) + (171,714/1.2²) + (180,780/1.2³) + (190,300/1.2⁴) + (800,000/1.2⁴)

NPV = $135,900 + $119,246 + 104,618 + 91,773 + 385,802

NPV = $837,339

NPV per apartment = $837,339/30 = $27,911