Chicago Apartment Investment Harvard Case Solution & Analysis

Chicago Apartment Investment Case Study Solution

Effect of Demographic on Recommendation

Demographic in considering the investment in property plays an important role for the investor to decide that whether to invest in properties located in area where the demographics are desirable or not to invest in the property in area where demographics are less reliable. Demographics of a particular area such as age, income and profession of the people living in the area should be considered by the investor. High income generating commercial areas where offices are located provides an indication that the demand of that particular property will increase with the passage of time as the demand for offices or other business activities will increase. Moreover, people with high income living in the area also provides an indication that people who require apartment to live could pay high rent without any delay is also an positive sign for the investors that the cash flow from the property will be generated smoothly. Hence, the difference in demographics of properties located in different area effect the recommendation for investing in the property by forecasting the growth and demand of the property according to the demographics as well.

Data of Each Property with Comparable Purchase Price

The PerennialThe WestchesterSouth Indiana
Number of units729672
Rentable Square Feet79,20076,00054,600
Gross Purchase Price$7,000,000$7,000,000$4,000,000
Depreciable Base$5,250,000$5,250,000$3,000,000
Depreciable Life (Capital Recovery Period)27.527.527.5
Estimated Sales Price$9,000,000$9,000,000$5,160,000
Expected Year of Sale101010
Net Operating Income (NOI)$559,096$610,317$379,200
Annual Increase in NOI3%3%3.00%
Leasehold Payments$0$0$0
Equity Investment$2,100,000$2,100,000$1,200,000
Amount of 1st Mortgage$4,900,000$4,900,000$2,800,000
1) Interest Rate5.5%5.5%6.5%
2) Term10 years10 years10 years
3) Amortization Period25 years25 years25 years
4) Constant Loan Payments7.46%7.45%8.20%

Financial Analysis

The three options which were provided by the broker includes the investment in 3 different properties i.e. the Perennial, Westchester and South Indiana. The most attractive return which are determined after conducting financial analysis is found to be the return of Westchester. The after tax expected cash flows of each property is analyzed and found out that the Westchester property is providing highest return out of all the properties mentioned by the broker. Furthermore, the capitalization rate of the Westchester is also highest among all the properties which indicates that the net operating income of that particular company is also highest among the recommended property. Moreover, the salary level of south Chicago area is also higher in comparison with the salary level of South Indiana which provides an indication that the cash flow generated by the property located in South Chicago will generate high returns than the property located in South Indiana.

Conclusion

The analysis on the options of property and the data provided by the broker enable to find and evaluate the most suitable property for the investor by considering the risk appetite of both the investors who are considerate in investing in the real estate sector to diversify their portfolio and enhance their risk and return characteristics. Hence, it is determined in the analysis that both the investors should invest separately in different kind of property which are suitable to them according to the specifics which are mentioned in their investment policy statement............

 

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