Question

A real estate developer is evaluating a 40-unit apartment development. The expected average occupancy is 90%. Cost of land: $1,200,000 Construction: $4,800,000 Project Life: 25 years Maintenance: $100 per unit per year (regardless of weather a unit is occupied). Annual insurance and property taxes: $400,000 Required return: 12% per year (0.9489% per month) Assume that the building will have NO salvage value at the end of 25 years, BUT the land will appreciate at a rate of 5% per year. Determine the total minimum monthly rent (all units combined) that should be charged, given the required return.

Answer 1

Answer:

Monthly Rent = 92825.46

Explanation:

$C * \frac{1-(1+r)^{-time} }{rate} = PV$

Total investment 6,000,000

Income per year: X

rate of return 0.009489 per month

time 25 years x 12 months = 300

We will solve for the monthly income of the project.

$C * \frac{1-(1.009489)^{-300} }{0.009489} = 6,000,000$

This should be the net income per month $60,492.12803

Now well do the monthly income statment to solve for rent:

Rent + Aprreciation of land - Property tax - maintenance = net income

Rent + 1,200,000 x 0.05/12 - 400,000/12 - 100 x 40 = 60492.13

Rent = 60492.13 - 5000 + 33333.33 + 4,000  = 92825.46