Ms. June Cleaver is considering investing in an apartment complex in Tucson, Ari

Question

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 he’s been unable to find a job in this tough economy for some time. She’s currently doing her due diligence on the property and has employed you to help her “run the numbers” 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 it’s a good investment. She can’t 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?

Explanation / Answer

a) she should npt buy the property since the net income from the property for a year is negative.

b) Risk, time and cost are some other factors which are to be considered for making a large investment.

c)In Investment business, Rental business, NOI Income Approach be used in the valuation process.

Cost of the property $700000 Note 550000 Revenue One bedroom unit 63000 Two bedroom unit 54000 Laundry & Vending machine 12000 Total gross income 129000 Expenses Collection expense 9030 Property taxes 44250 Interest 60500 Depreciation expense 22641 Total expense 136421 Net income -7421

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