4-Unit Apartment Complex

Location: Idaho Falls, ID

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CSDL, LLC is considering purchasing a four unit apartment complex in Idaho Falls, Idaho. It is 3,600 square feet and also includes a two car garage for each unit. We purchased the complex for $247,800. We based our rent price on rent for a comparable apartment in Idaho Falls. We plan to charge rent of $475 in our first year and increase by 3% each year to pace inflation. We anticipate our rent will increase based on our expectations for real estate demand in Idaho Falls to have sustained growth. This growth is due to the establishment of large companies such as Areva and the growth of the nearby colleges BYU-I and ISU.

All maintenance will be done by our company so there will be no labor expense. Our maintenance, insurance, utility, and property taxes were calculated using the numbers from our comparable apartment. We contacted three local banks and found an average interest rate, closing cost, and down payment for a non-owner occupied housing loan. We assumed our income tax rate would be 35% based upon national averages.

We depreciated our complex over 30 years using the straight line method and a salvage value of $30,000. We set our minimum cash balance to $5,000. We used the average interest rate for business loans from local banks to calculate our bank loan interest expense.

In evaluating the potential profitability of our purchase, we predicted the demand our equity holders would expect based upon average returns and betas for six residential REITS. After 15 years, we anticipate selling the complex for $175,000. This significant drop in price will account for future renovations that will need to be made by the purchaser.

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