Ms. June Cleaver is considering investing in an apartment complex in Tucson, Arizona, to provide her with some retirement income and her son, Theodore, with a job as the maintenance superintendent since heâs been unable to find a job in this tough economy for some time. Sheâs currently doing her due diligence on the property and has employed you to help her ârun the numbersâ and examine the records.
The seller is asking $700,000 for the property and is willing to carry a $550,000 note (seller financed) at 11% for 30 years. The building will be depreciated using the straight--line method over 27.5 years with a depreciation expense of approximately $22,641 this year. The complex has 15 one bedroom units renting for $350.00 a month and 10 two-bedroom units that go for $450.00. The unit also has some laundry and vending machine income of approximately $1,000 a month, give or take a variance of 10% each month. An extensive examination of the books reveals that vacancy and collection rates have averaged about 7% of potential gross income with operating expenses and property taxes averaging about $44,250 a year. Furthermore, your research reveals capitalization rates on similar properties are about 12%. Please assist Ms. Cleaver is evaluating the property and deciding if itâs a good investment. She canât afford to lose money in her retirement.
a) Should she buy the property at the asking price using the Net Operating Income Approach?
b) What other factors should be considered when making such a large potential investment?
c) What other types of businesses could the NOI Income Approach be used in the valuation process?
Ms. June Cleaver is considering investing in an apartment complex in Tucson, Arizona, to provide her with some retirement income and her son, Theodore, with a job as the maintenance superintendent since heâs been unable to find a job in this tough economy for some time. Sheâs currently doing her due diligence on the property and has employed you to help her ârun the numbersâ and examine the records.
The seller is asking $700,000 for the property and is willing to carry a $550,000 note (seller financed) at 11% for 30 years. The building will be depreciated using the straight--line method over 27.5 years with a depreciation expense of approximately $22,641 this year. The complex has 15 one bedroom units renting for $350.00 a month and 10 two-bedroom units that go for $450.00. The unit also has some laundry and vending machine income of approximately $1,000 a month, give or take a variance of 10% each month. An extensive examination of the books reveals that vacancy and collection rates have averaged about 7% of potential gross income with operating expenses and property taxes averaging about $44,250 a year. Furthermore, your research reveals capitalization rates on similar properties are about 12%. Please assist Ms. Cleaver is evaluating the property and deciding if itâs a good investment. She canât afford to lose money in her retirement.
a) Should she buy the property at the asking price using the Net Operating Income Approach?
b) What other factors should be considered when making such a large potential investment?
c) What other types of businesses could the NOI Income Approach be used in the valuation process?
