Gary Sofer wants to estimate the market value of the Wabash Oaks Apartments, a 12-unit building with 6 one-bedroom units and 6 two-bedroom units. The present owner of Wabash Oaks provided Gary with the following annual income statement. Today’s date is March 1, 2016.

Current rental rates of properties similar to Wabash Oaks typically run from $425 to $450 per month for one-bedroom units and $500 to $550 per month for two-bedroom units. From a study of the market, Gary determined that a reasonable required rate of return for Wabash Oaks would be 9.62% and that vacancy rates for comparable apartment buildings are running around 4%.

Questions

a. Using Figure 18.1 as a guide, discuss how you might go about evaluating the features of this property.

b. Gary has studied economics and knows about demand and supply, yet he doesn’t understand how to apply them to an investment analysis. Advise Gary in a practical way how he might incorporate demand and supply into an investment analysis of the Wabash Oaks Apartments.

c. Should Gary accept the owner’s income statement as the basis for an income appraisal of Wabash Oaks? Why or why not?

d. In your opinion, what is a reasonable estimate of the market value for the Wabash Oaks?

e. If Gary could buy Wabash Oaks for $10,000 less than its market value, would it be a good investment for him? Explain.

Transcribed Image Text:

Gross income Less: Expenses Utilities Owner's Income Statement Wabash Oaks Apartments, 2016 $14,260 $65,880 Property insurance $ 2,730 Repairs and maintenance $ 1,390 Property taxes $ 4,790 Mortgage payments $18,380 Total expenses Net income $41,550 $24,330