A 30-unit apartment building should last 35 years, when it will need to be either replaced or undergo major renovation. Assume the building's value at 35 years will be 10% of its construction cost. Assume it will be sold, and the land's cost will be recovered in full.
Land: $3.2M
Building: $4.8M
Annual operating maintenance: $850,000
Annual property taxes and insurance (% of initial investment): 6%
Vacancy rate: 12%
(a) If the owner wants a 15% rate of return, what is the required monthly leasing cost for each unit?
(b) If turning 2 units into an exercise facility would decrease the vacancy rate by 5%, would that be a good decision?