You are considering developing a new apartment building with 300 units of 1,000 rentable square feet each.
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Question:
You are considering developing a new apartment building with 300 units of 1,000 rentable square feet each. The expected rent is $2.00 per rented sf. per month with a vacancy of 5% and 0.5% bad debt allowance. (Hint: Build a spreadsheet to answer these questions.)
- What is the expected potential gross income (or gross potential revenue)?
- What is the expected effective gross income?
- The operating expenses are projected to be 30% of the effective gross income. In apartment buildings, the landlords are responsible for operating expenses. What is the expected NOI?
- The going-out cap rate is 4%. For how much you expected to sell this building?
- The design of your apartment building implies an efficiency of 80%. What is the estimated gross square footage (gsf) of your building?
- The construction hard cost is $175/gsf (including a garage). What is the estimated hard construction cost?
- You estimate that soft cost is 10% of hard construction cost and that development contingency is 3% of hard construction cost. What are the estimated soft cost and development contingency?
- Assume that the land cost $10,000,000. What is the total project cost (land+hard cost+ soft cost + development contingency)?
- You obtain a construction loan. You borrow 60% of the total project cost at 6% annual interest rate. Assume that your construction loan will have a two-year term and average draw during these two years equal to 65%. What is the estimated construction loan interest?
- Using your previous answers, what is the overall cap rate (or yield on cost) of your project?
- Assuming that your feasibility criteria is that the spread between the yield on cost and the going-out cap rate is greater than 150 basis points. Is this project economically feasible?
Related Book For
Real Estate Finance and Investments
ISBN: 978-0073377339
14th edition
Authors: William Brueggeman, Jeffrey Fisher
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