Location: Rexburg, ID
The attached spreadsheet model is for the 38-unit apartment complex located in Rexburg, Idaho, and currently listed for sale at $3,500,000. This model includes a pro forma income statement and balance sheet for the complex based on market assumptions in the area and an analysis of the costs of capital and internal rate of return forecasted for the complex. The model allows variables to be changed for all major inputs of the computations and includes citations for assumed values in the models.
In the model with the input values chosen, the complex would have a weighted average cost of capital of 8.38%, but only has an internal rate of return equal to 3.25%. Realizing that the cost of capital may be adjusted by changing the debt and equity proportions, we have attempted to do so, but no reasonable proportions work to allow the cost to be close to the 3.25% return.
For this reason, we believe the listed sales price for the complex is not a reasonable amount. Lowering the sale price to approximately $2,900,000 increases the internal rate of return to 5.34%, and a matching cost of capital could be attained with 75% debt and 25% equity. Recognizing this might be too much debt to begin the company, but would be acceptable after the company was established, a more reasonable initial purchase price would be approximately $2,600,000, which would lead to an 8.5% return on cost of capital for the complex.