Real Estate Planning: Apartment Investment Opportunity Analysis

This project analyzes three Chicago apartment investment opportunities presented to two cousins by a local broker. The assignment evaluates these properties, considering factors like risk-adjusted returns, income, and market demographics. The analysis includes optimistic and pessimistic sce...Read More

Running head: Real Estate Planning
Real Estate Planning
Name of the Student
Name of the University
Author Note

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Real Estate Planning
Table of Contents
ANSWER TO QUESTION NO 1..............................................................................................2
ANSWER TO QUESTION NO 2..............................................................................................2
ANSWER TO QUESTION NO 3..............................................................................................3
ANSWER TO QUESTION NO 4..............................................................................................4
ANSWER TO QUESTION NO 5..............................................................................................4
ANSWER TO QUESTION NO 6..............................................................................................5
Bibliography...............................................................................................................................6

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Real Estate Planning
ANSWER TO QUESTION NO 1
There is no change in the assumptions that taken by the brokers as all the assumption
looks reasonable regarding the property. It has taken holding period of 10 years that looks
reasonable as a person will hold the place for 10 years at least as it is been purchased for
investment purpose so to get better return a person hold investment for 10 years minimum.
The vacancy rate is 5% which is been taken least as the property will not be engaged
throughout the year so taking 5% is normal. The rent is also be taken by relevant source so no
question upon the assumptions should be made and all other assumption should also not be
changed as all the assumption which are taken by the broker’s look reasonable.
ANSWER TO QUESTION NO 2
Optimistic analysis refers to analysis in which maximum return is been taken and all
the calculations are been considering it. In the given case the optimistic analysis have be of
all the three project by assuming the change of rent as in normal it was $1150, but in
optimistic situation it has been increased by 20% so it became $1380. So, as result of this the
IRR of all the three company have changed as in normal it was of all the three case was
Normal scenario In Perennial – 14.62%, In the Westchester – 39%, In South Indana – 21%
Optimistic scenario In Perennial – 17.75%, In the Westchester – 49%, In South Indana – 26%
So it can be seen in Optimistic situation the IRR of all the three projects have increase
in different margin.
Pessimistic analysis refers to the analysis in which minimum return is been taken and
all calculations are been considering it. In the given case the pessimistic analysis, have been
done of all the three project by decreasing the normal rent by 20% as the normal rent was

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Real Estate Planning
$1150 but in pessimistic situation it is $920 as it decreased by 20%. Therefore, the result of it
is the IRR of all the three company has changed which can see in below as
Normal scenario In Perennial – 14.62%, In the Westchester – 39%, In South Indana – 21%
Pessimistic scenario in Perennial – 12%, In the Westchester – 29%, In South Indana – 16%
It can clearly say that due to Pessimistic situation the IRR of the company has
decrease as it consider the minimum factor.
In the above it can be seen all the three scenario of the projects. The above analysis is
been done on IRR but NPV of the project also changes and to get the full details of the
calculations kindly check the check which contain separates sheet of each scenario and the
person can know all the details regarding all the calculations.
ANSWER TO QUESTION NO 3
In the given case it can be seen that, the normal return of the investments is 10% and
it have got three project from which it has to select one. It have to choose between one of the
three and it will select on the basic of IRR as the one having the highest IRR will be able to
give most return to the company.
The project name as The Perennial in this the IRR is 14.62 and the normal return is
10% so the company will get more from investing in this project.
The second project is The Westchester in the IRR is 39% and the normal return is
10%, it can clearly be said that the company will earn more than normal if it invest in this
project.
The third and last project the company has is South Indana in which IRR is 21% and
the normal return is 10% so it can be clearly can said the company will earn more if it invest
in the project.

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So from the above discussion it can be clearly be seen that the highest IRR is 39%
which the company is earning in project The Westchester so the company should adopt the
second project if they are taking their decision with the help of IRR.
For details about calculations kindly check the excel sheet where all the detailed calculation
of IRR can be found.
The above analysis include the growth and vacancy so it minimize the risk of
investment as if the individual does not able to get the required rent, so that is why the
vacancy has been considered to avoid the risk of vacant properties. As the growth is, also
consider in normal rate so if the property does not grow well than also the investors will get
the required return.
ANSWER TO QUESTION NO 4
Both of them should take the second project, as the project, which is The Westchester,
is having the highest IRR. The second project will give them the highest IRR. The other
project, which they should consider, is South Indana as this the project which is good option
after The Westchester as it also gives a good return to the individual. Therefore, they both
should select these two projects for investments purpose.
ANSWER TO QUESTION NO 5
They should invest in partnership as it can increase their capital contribution and also
it will able to make them decrease their borrowing cost and as a results of it they will able to
increase the NPV of the project and will able to get more return from the project. They should
invest in both project in partnership so that they can even diversify the risk of investments
and able to get return high at the end of 10 years.

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Real Estate Planning
ANSWER TO QUESTION NO 6
Some changes which can come in the market conditions is that the borrowing cost of
the institutions has been increased as a result of it the company have to pay more interest
compare to what they have been budgeted so it will decrease their profit structure and also it
will reduced the IRR return upon the project.
Some changes that can come in demographic conditions is that what kind of people
will be staying in the place and what kind of locality it will be. It may happen that the place
where project is been made became a low standard place and the locality is filled with worker
or labour class so as a result of it the price of the land would not increase as it is been
expected in the project.

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Bibliography
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of Finance and Investment Analysis, 2(2), pp.77-88.
Burger, P. and Hawkesworth, I., 2013. Capital budgeting and procurement practices. OECD
Journal on Budgeting, 13(1), pp.57-104.
Chittenden, F. and Derregia, M., 2015. Uncertainty, irreversibility and the use of ‘rules of
thumb’in capital budgeting. The British Accounting Review, 47(3), pp.225-236.
DellaVigna, S. and Pollet, J.M., 2013. Capital budgeting versus market timing: An evaluation
using demographics. The Journal of Finance, 68(1), pp.237-270.
Grob, H.L., 2013. Capital budgeting with financial plans: an introduction. Springer-Verlag.
Hasan, M., 2013. Capital budgeting techniques used by small manufacturing
companies. Journal of Service Science and Management, 6(01), p.38.
Hornstein, A.S., 2013. Corporate capital budgeting and CEO turnover. Journal of corporate
finance, 20, pp.41-58.
Malenko, A., 2018. Optimal dynamic capital budgeting. Available at SSRN 1710884.