Real Estate Value Model (Excel)

Instructions: below is a description of an investment. Read the information provided in the two paragraphs before the bullet points. Set up a spreadsheet for valuing this opportunity using Excel functions to answer the questions given in the bullet points below such that by simply entering the values given in the bullet points in specific cells the values in your model will update and provide correct answers

The Project: you recently added an investment property to add to your existing portfolio. The property is a three story six flat of luxury apartments in an area in high demand with outstanding local amenities. The building has had a 100% occupancy rate year over year for many years. The building manager fields many unsolicited requests for information about availability. All tenants always pay exactly on time.

The specifics of the opportunity are as follows:

Property purchase price $2,250,000. Loan to Value Ratio (LTV) 80%

Loan Terms: fully amortized over 30 years at 4.25% APR paid monthly

The property offers six recently updated “luxury” apartments. Each apartment has 3 bedrooms and 2.5 baths in 1,800 square feet of living space. Rents are $1,690 per month per apartment. All six units are leased but one of the units only receives half rent because the tenants in that unit are responsible for year round cosmetic maintenance of the walkways and greenspaces and also minor emergency repairs. You plan to invest an additional $150,000 in paid in capital for cosmetic updates on the property and closing fees. The tax rate on the property is 1.75% of the purchase price. For the sake of simplicity will assume that taxes and rents are constant.

1) What is your first year profit (revenues minus expenses) from this investment both in dollars and in rate of return

2) If you can lower your monthly interest charge by 50 basis points (to 3.75%) by paying 3.0 “points” at closing, should you do it? Explain why or why not and demonstrate how the values change in the spreadsheet by showing values with and without “points”.

3) Under the original loan conditions, how much do you have to pay extra each period to make the loan pay off in 20 years? What is the interest cost savings from doing that?

4) Under the original loan conditions, what is the total cost of the loan if you alter the terms of the loan to lower your payments by adding a $250,000 balloon payment at the end? What will the new payments be?

5) If you hold the property for exactly 10 years then sell it for $3,500,000 what rate of return did you get if you consider the cost of a loan that you took to purchase the property given these loan conditions: $3,500 origination fee and $5,875 closing costs and 2.0 points paid at closing. Assume the loan was carried from purchase to close of sale then repaid exactly ten years after purchase. For simplicity we will assume that taxes and rents are held constant.

All work must be shown in Excel

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