real estate project and need the explanation and answer to help me learn.
All the details are comprehensively on in the attached file.
Requirements:
Real Estate Finance
Project 2
Individual Project 2: Residential Investment
DO NOT USE GOOGLE SHEETS FOR THIS ASSIGNMENT.
CARRY OUT ALL YOUR CALCULATIONS IN EXCEL USING EXCEL FUNCTIONS AND SHOW YOUR WORK!
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BACKGROUND
You are interested in purchasing a rental residential property as an investment for your personal portfolio. To be able to buy more properties faster and diversify, you decide to contribute 20% of the equity required for the purchase and have a capital investor, who will contribute the remaining 80%.
YOUR TASKS:
1) Identify Property: Go to Zillow (https://www.zillow.com), Redfin (https://www.redfin.com), Realtor (https://www.realtor.com), or another website and identify a condo, single-family home, or townhome that you would like to analyze as potential investment opportunity. (Location must be in the US)
Explain why you picked this property and location/neighborhood.
2) Market Analysis (Rental Rates): Using information from the Costar multifamily report and/or websites with rental information such as Realtor or Apartments.com, collect information to answer the following questions:
a. What is an appropriate rental rate per month for this property right now and why?
b. At which annual percentage do you expect the rental rate to increase and why? In your discussion, you can use arguments such as inflation as well as demand and supply characteristics.
3) ?Market Analysis (Vacancy & Collection Losses): Make assumptions about vacancy & collection losses for your rental unit. You can express V&C as a percentage of PGI.
4) ?Market Analysis (Operating and Capital Expenses): Using the Costar multifamily report and/or information from the National Apartments Association (https://www.naahq.org/national-apartment-association-2021-survey-operating- income-expenses-rental-apartment-communities), collect information to answer the following questions:
a. Assuming you do the property management yourself, which annual operating expenses, either in $/SF or %, would you assume for the property and why?
Please note: Apartment buildings with a Costar rating of 4 and 5 are newer, higher quality properties with lots of amenities (e.g., gym, outdoor areas) that might not be comparable to your property. Select a Costar rating that approximates the quality of your property. For more information on the Costar ratings, please see: https://www.costar.com/docs/default-source/brs-lib/costar_buildingratingsystem- definition.pdf (Multi-Family Section)
At which rate do you expect the operating expenses to increase each year and why?
Which capital expenses each year would you assume and why?
5) Market Analysis (Cap Rate): Using the Costar multifamily report, which current cap rate would be appropriate as a going in cap rate for your proposed property and why?
Please note, the Costar multifamily report provides cap rates for apartment buildings, however, you can use this cap rate information as a basis for a cap rate for your property. The cap rate will be between 6 and 9%. Explain your answer.
6) ?Mortgage: Assume that lenders require a down-payment of at least 25%, i.e., offer you a mortgage with an LTV of at most 75%. Go to Google (Mortgage Rates) to get the average rates as of the day you are conducting this analysis. Use your credit score and preferred down-payment amount & loan amount to obtain interest rates on different types of mortgages (fixed and adjustable/floating rate mortgages are sufficient).
Select a mortgage youd like to use for this purchase and answer the below questions:
Which down-payment percentage did you select and why?
Which mortgage did you select and why?
7) ?Pro-Formas and DCF: Prepare the pro-formas for operating and equity reversion cash flows to the Before-Tax level (i.e., BTCFs and BTER) for the 10-year holding period.
Assume 1% of the mortgage amount as financing costs. Additionally, assume 2% of the purchase (year 0) and sales price (year 10) as purchasing and selling costs respectively. Financing and purchasing costs are out-of-pocket expenses that increase the equity required to purchase this property (assume you contribute 20% and your investor 80% of these additional costs).
Answer the following questions:
Using the NOI in year 1 and the going in cap rate you identified based on the
Costar multifamily report, what is the price you would pay at most for this property? How does it compare to the listing price, i.e., is the property over- or under-valued based on your assessment of its rental income potential?
If you identify the property to be over-valued, use the maximum purchase price you are willing to pay for it as the basis of your mortgage payments and further analysis.
Which going-out cap rate do you assume and why?
Your capital investor requires a return of 9% for this property. What is your required return for this investment and why? You can use, for example, stock market information or data from single-family crowdfunding sites such as Arrived homes (https://arrivedhomes.com/properties) to determine your required return.
Calculate the before-tax IRR (BIRR) for your investment project. Does this IRR meet your required return? If not, which strategies could you develop to improve your IRR? Explain.
What is the cash on cash yield each year? What is the average cash on cash yield over the entire holding period? (Do not include the equity reversion cash flows in year 10 in the year 10 cash on cash yield.) Is this yield attractive to you? Why/why not?
While you do not need to include them in your financial analysis, are there any capital improvements to the property you would like to do to improve its ability to achieve a higher rent? If yes, what are they, and why?
8) Waterfall structure: Your capital investor requires a minimum return of 9% on this investment (target IRR) in return for their 80% contribution to the down-payment (equity) required for this investment. All operating cash flows from the property go to the investor until the target IRR has been achieved. Once the target IRR has been met, all remaining cash flows from operations and sale get split 80/20 between capital investor and you. If there are negative BTCFs, assume that they are split 50/50 between investor and sponsor. Developed the waterfall structure and answer the following question:
a. What is the BIRR for you and your capital investor respectively? Is this investment worth undertaking for you and your investor? Why/why not?
9) Sensitivity analysis: Conduct the following sensitivity analyses to get the BIRR for investor and yourself.
Untended rental income: Assume that you cannot increase rental rates after year 1. Is the investment still worth undertaking for you and the investor?
Going out cap rate: Assume that your going-out cap rate is 1) 100bp and 2) 50bp higher. Is the investment still worth undertaking for all partners?
DELIVERABLES:
Submit your 1) Excel file with all the calculations (use different sheets) and 2) Word file with your assumptions and answers to my questions. For the Word file, you can use the assignment outline and just answer the questions below the respective bullet points. Make sure you answer all questions and provide all the information required. Please add a reference list with all the resources that you have consulted for this project. There is no minimum or maximum word requirement.
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