Problem
• The Matrix is a 94 unit student housing development located just off campus between the University of Houston and Texas Southern University. All units are 500 sq ft studios that lease for $1,200 per month. Rents are expected to grow 7% every year. Vacancy is 8%. Management Fee is 4%. Taxes for the year are at $245,000 and Insurance is at $28,000. Both are expected to increase by 5% every year. There are also yearly expenses for: Electricity - $45,000; Water & Sewer - $125,000; Trash - $20,000; Administration - $250,000; Repairs & Maintenance $45,000 and landscaping -$18,000. All of these are expected to grow 5% every year.
The Matrix costs $10 million. Your lender has arranged a 70% LTV loan for 5 years (amortized over 30 years) with a 7.5% interest rate. The $7 million loan means monthly loan payments of $48,945. Since the term is only for 5 years, the balloon payment will be $6,623,221 at the end of 5 years. Your broker will charge you 2% of the sales price and she suggests that you can sell it for a 5% cap rate (year 6 NOI divided by 5%)
• How much money will you make if you buy this investment? SHOW YOUR WORK! Send excel file
• Using the model above, would you make more if you invested in IGR for the same amount of time? IGR share price is $5.39 today and pays $0.06 per share every month. Let's say you hold this security for the same amount of time (60 months). Also, suppose that you sell the shares in at the end of the holding period for the same price that you bought it for. What is your return?
• Which investment is better and why?