Wk 6 is done need Wk 7 and Wk 8. Under Individual Assignments in PDF
Scenario 1- 1. How did Sally go about searching for the property (positives and negatives) and what was her investment criterion? Ans – Sally just graduated from the Georgetown University Graduate real estate program. Just after graduating she went for searching the property to invest in it. Now there are some positives and negatives related to it. Positives: a) She is graduated in Real Estate program. b) She has excelled in market study class and can conduct trade analysis. c) She has also excelled in GT Real Estate Finance and can efficiently run the feasibility studies. d) The Property is located conveniently on the main Woodland and is close to transportation, banks, grocery shops etc. e) The property is close to the airport, route 13, I-95 and other major roads. f) Once renovated, it can generate 50% more rental income than before. g) There is rear yard in property which can be used as common area and also out of 3850SF of total area almost 93.5% can be used for the renting purpose, i.e., 3600SF. Negatives: She has just graduated from the university and does not have the much practical knowledge to handle this project all alone. The property selected is a century old building though renovated in 1991. It requires a lot of renovation as everything in there is outdated or waste. There is no security system and parking is on the street. There are roof leaks and other things which require a full replacement. She wants to be GC for this but does not have any experience in this area. One unit in building was added without building permit which can pose challenge for renovation. The main criteria for her investment was multi-family property located in Southwest Philadelphia as it was conveniently located on main Woodland and close to all the basic and important locations as well as airport. Also she knew that properties were appreciating in the neighborhood and looked at national surveys for the multi-family property exit cap rates when estimating an exit cap for this project. Apart from the monetary benefits, Sally also thought that it can occupy 3rd floor while the operations can be done and that can save her from buying the house as the area was also good. 2. As a friend of Sally, she asks for your input. How would you approach evaluating this investment? Ans – Real estate investment is one of the famous investment options available to anyone as the appreciation of the wealth is good in such investment. Sally has found a good investment option in Woodland Avenue as it is multi- family property with 5 rental option thus generating good rental income. There are both pros and cons of this investment. Pros – a) Multi - family property b) Exit cap rate from MF property is good and appreciating c) Generation of good rental income d) Good efficiency ratio. (93.5% area can be rented) e) Rear yard in the property. f) Close to important shops, groceries, airports etc. Cons – a) Century old building b) It requires a lot of renovation work thus increasing the buying cost by 15% approximately. c) There is no parking area d) The landlord is responsible for many expenses such as water/sewer, real estate taxes, insurance, repairs and maintenance. e) There is also no security system but can be installed. f) One unit added without a building permit thus making renovation a tough job. After going through the excel analysis of the investment, putting in all the relevant values depending on the market rates such exit cap rate, loan capitalization rates, given the purchase cost “as is” is $420,000 plus renovation expense of $51,000. The total loan to value comes to $336,006 which leaves Sally with $152,840 of self-equity to perform the relevant job and investment. Though the cash flows are positive beginning the first year given the interest rate etc. and after serving the monthly EMIs, the net proceeds after three years depending upon 8 percent exit cap rate is also positive, However the Internal Rate of Return (IRR) is negative at -14.17% which suffice the option of not to invest in this property going by the given details. Negative IRR means the cash flows are negative and will not cover the investment done. So, as a friend of Sally, I would recommend not investing in this property as there are many cons than pros and internal rate of return is negative. 3. How would you evaluate Sally’s approach to underwriting and sourcing the mortgage? Ans – Sally estimated that minimum leveraged return required from the investment must be at least 10%. She decided to earn as a property management fees by taking 10% of the collected revenues to mitigate her loan and other finance. She is having a great knowledge of real estate finance decided to take a loan with a 10 year balloon term. She also reached out to family and friends to complete the required equity. By running the numbers she got 68.73% of the total amount required for building to complete as a loan. I would rather suggest not taking the balloon term loan in case of real estate investment as it is riskier if the term is too long. Had it been 4-5 years it would have been feasible because at a much later date such investment becomes riskier. Also depending upon the current rental income and then coming to the loan to value, it is much lower in terms of loan to cost thus requiring sally to invest on her own and hence putting pressure to clear the both. However, her approach in underwriting is good depending on the latest trends in the real estate market but for the source of mortgage it is doubtful if the cash flows will be sufficient enough to clear both the loan and self-equity. 4. Based on Sally’s underwriting, experience and lifestyle, do the investment and her role make sense for her? Ans - Based on Sally’s underwriting, experience and lifestyle, it somewhat makes less sense for her to take up such project after just graduating for the university. She might have excelled in real estate finance, marketing etc. but handling a practical project which involves lot of renovation, building permits to be completed, struggling to get self-equity is a tough job for a fresher. Since she wants to act as a GC for this project, she has no experience in this role thus making it difficult to cope with the future challenges associated with it. Moreover staying at the property and occupying the third floor will not be beneficial as the IRR as still negative and she works full time at a local appraisal firm thus making it more difficult to stay at property and work. Thus keeping in mind the negative IRR, multiple challenges, almost nil practical experience, Sally does not fit for her role and investment. However she can assist senior person in this project and gain relevant knowledge and experience regarding such projects. Addendum woodland-ave-apart ments-feasiblity-model-template-fall-2019-1-bkrovqex.xlsm woodland-ave-apart ments-feasiblity-model-template-fall-2019-1-bkrovqex.xlsm Evaluation by Sally Woodland Avenue Scenario I Gross Building Size3,850 sf Rentable Building Size3,600 sf Basement 2BR 1.5 BA900 sf 1st Floor Studio - 1BA450 sf 1st Floor Studio - 1BA450 sf 2nd Floor - 2BR 1.5 Bath900 sf 3rd Floor - 2BR, 1.5 BA900 sf Efficiency Ratio93.5%difference is hallways Land Area0.04 acres FAR2.07 FAR Total Basement 2BR 1.5 BA$900 per unit per month$ 10,800Resident pays unit electric bills 1st Floor Studio - 1BA$750 per unit per month9,000Resident pays unit electric bills 1st Floor Studio - 1BA$750 per unit per month9,000Resident pays unit electric bills 2nd Floor - 2BR 1.5 Bath$950 per unit per month11,400Resident pays unit electric bills 3rd Floor - 2BR, 1.5 BA$925 per unit per month11,100Resident pays unit electric bills Sub-Total$ 51,300 Vacancy and Collection Loss12%6,156 Effective Gross Income$ 45,144 Real Estate Taxes$ 3,725 Insurance2,750 Common Area Utilities1,100 Property Management10%4,514 Painting of Units when they turn$0 per unit0 Sub-total12,089 Net Operating Income$ 33,055Weighted rent average from existing tenants: $17.50 Weighted rent average from existing tenants: $17.51 CostPer SFTotalWeighted rent average from existing tenants: $17.52 Purchase Price - BUILDING$ 420,000Weighted rent average from existing tenants: $17.53 Renovation Costs51,000Weighted rent average from existing tenants: $17.54 CONTINGENCY10.00%5,100Weighted rent average from existing tenants: $17.55 Lenders Attorney Costs0Seller and Buyer split these costsWeighted rent average from existing tenants: $17.56 Closing Costs - Origination fee0.00%0Weighted rent average from existing tenants: $17.57 Closing Costs - Buyers attorney & fees0 Operating Expense Carry During Renovation3,725 Debt Service Reserve During Renovation0 Working Capital - Two Months Opex and Debt Service621 Closing, Escrow2.00%8,400 Total Costs$ 488,846 To Size Value for Lending Purposes Net Operating Income for Valuation & Loan Sizing$ 33,055 Capitalization Rate7.87%$ 420,008 Loan by LTV Test80.00% LTV Ratio$ 336,006 Interest Rate6.00% Amortization25 years Loan Constant7.73% Minimum DSC1.15 X Maximum Loan to Cost80.00% Loan per LTV Ratio$ 336,006 Loan per DSC Ratio372,000 Loan per LTC Ratio391,077 Concluded Loan - Min of LTV, DSC, LTC Tests$ 336,006 Concluded Loan to Cost68.73% Selected Loan$336,006 Annual Payment$ 25,979 Required Equity$ 152,840 Cash Flow After Debt Service$ 7,076 Difference Between our Cost and Value$ (68,838) Now We Introduce Time to this Analysis…Year 1Year 2Year 3 Basement 2BR 1.5 BA2.50% increase per yr$ 10,800$ 11,070$ 11,347 1st Floor Studio - 1BA2.50% increase per yr9,0009,2259,456 1st Floor Studio - 1BA2.50% increase per yr9,0009,2259,456 2nd Floor - 2BR 1.5 Bath2.50% increase per yr11,40011,68511,977 3rd Floor - 2BR, 1.5 BA2.50% increase per yr11,10011,37811,662 Sub-Total$ 51,300$ 52,583$ 53,897 Vacancy and Collection Loss12.00% increase per yr6,1566,3106,468 Effective Gross Income$ 45,144$ 46,273$ 47,429 Real Estate Taxes2.00% increase per yr3,7253,8003,875 Insurance2.00% increase per yr2,7502,8052,861 Common Area Utilities2.00% increase per yr1,1001,1221,144 Property Management2.00% increase per yr4,5144,6054,697 Repairs and Maintenance2.00% increase per yr000 Total Operating Expenses$ 12,089$ 12,331$ 12,578 Net Operating Income$ 33,055$ 33,941$ 34,852 Debt Service$ 25,979$ 25,979$ 25,979 Cash Flow After Debt Service$ 7,076$ 7,963$ 8,873 CASH ON CASH RETURN FOR EQUITY4.630%5.210%5.805%