Location: Lawrence, MA
For Sale Website:
The attached spreadsheet model is for a three unit apartment building located at 61-63 Brook Street in Lawrence, MA, which is currently listed for sale at $229,900. The spreadsheet includes a pro forma income statement as well as a balance sheet based on historical data from the area. It also includes an analysis of the cost of capital and internal rates of returns expected for this apartment building. Through the attached model, one can change inputs which will allow an interested party to see how different calculations can affect the validity of this property’s profitability.
Based on an interested party’s research, assumptions have been made, and factoring in a down payment of 25%, we calculated an internal rate of return to be 6.92%. With the cost of gaining capital being just 5.18%, purchasing the building at the asking price would be a wise business purchase. However, with the investors expecting a higher rate of return, it would be wiser to only put 20% down which would lower the cost of gaining capital to only 4.7%. If the investor wanted to maintain the 25% down payment and receive a larger return, they could try to negotiate the asking price of the building. If they were able to purchase the building/land at $220,000, their cost of capital would be 5.27% with their rate of return being 7.18%. Even if the investors decided to purchase this building/land using 100% equity, they would still have a positive NPV at the end. No matter how much we adjusted the debt, we couldn’t make the debt and equity equal to each other. Instead of doing 100% debt, we added equity which raised the WACC. This was done simply because the increased equity is desirable to banks.
One concern with buying an apartment building is the instability of the housing market. If property values were to drop, the investor would be out a lot of money. Based on the forecast on the spreadsheet of the investor selling everything after 15 years, the seller would have to sell the building/land for only $163,328. Based on that being only 71% of the current asking price of the property, this investment is a good one.