J&M Company is a real-estate developer considering a 40-unit apartment complex in a growing college town. As
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J&M Company is a real-estate developer considering a 40-unit apartment complex in a growing college town. As the area is also booming with foreign automakers locating their U.S. assembly plants, the firm expects that the apartment complex, once built, will enjoy a 90% occupancy for an extended period. The firm already compiled some of the critical financial information related to the development project as follows:
- Land price (1 acre) = $1,200,000
- Building (40 units of single bedroom) = $4,800,000
- Project life = 25 years
- Building maintenance per unit per month = $100
- Annual property taxes and insurance = $400, 000
Assuming that the land will appreciate at an annual rate of 5%, but the building will have no value at the end of 25 years (it will be torn down and a new structure would be built), determine the minimum monthly rent that should be charged if a 12% return (or 0.9489% per month) before tax is desired.
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