Question

You are considering a luxury apartment building project that requires an investment of $10,200,000. The building has 50 units. You expect the maintenance cost for the apartment building to be $350,000 the first year and $400,000 the second year. The maintenance cost will continue to increase by $50,000 in subsequent years. The cost to hire a manager for the building is estimated to be $82,000 per year. After five years of operation, the apartment building can be sold for $12,000,000. The market research shows that your units should be able to command is $3,000. Assume the building will remain 90% occupied during its five years of operation. What is the rate of return that this property can expect to earn?

Answer 1

We can calculate teh IRR using the table below.

Year	Investment	Maintenance	Manager	Revenue (90% * 3000 * 500)	Salvage	Net CF
0	-10200000					-10200000
1		-350000	-82000	1350000		918000
2		-400000	-82000	1350000		868000
3		-450000	-82000	1350000		818000
4		-500000	-82000	1350000		768000
5		-550000	-82000	1350000	12000000	12718000
					IRR	10.96%