Question

Problem 4 Once 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

Answer:

Maximum price you would pay = $837,338.31

Working:

Rent revenue for 2019 = $600 * 12 * 30 * 95% = $205,200

Calculation of cash flows and sum of present values is as follows:

Year Growth in rent Rent Revenue Payment to rental agency (10% * Rent Revenue) Repair maintenance cost ($800 * 12) Other cash expenses Operating cash flow 2019 2020 2021 2022 | 5% 5% 5% 205,200.00 215,460.00 226,233.00 237,544.65 (20,520.00) (21,546.00) (22,623.30) (23,754.47) (9,600.00) (9,600.00)| (9,600.00)| (9,600.00) (12,000.00)| (12,600.00)| (13,230.00)| (13,891.50) 163,080.00 171,714.00 180,779.70 190, 298.69 Sale value of building 800,000.00 Cash flow PV factor (1/(1+20%)^Year) PV of cash flows Sum of PV of cash flows 163,080.00 171,714.00 0.833333 0.694444 $135,900.00 $119,245.83 180,779.70 990,298.69 0.578704 0.482253 $104,617.88 $477,574.60 $837,338.31