Research paper
Project #2: Investment in an Income Producing Property.
REE 4303 - Fall 2020 – Dr. Beracha
In this report you will consider a hypothetical purchase of a real estate income producing
property and evaluate the expected levered-before-tax returns on a property of your
choice. Ultimately, you should decide whether committing your capital to the real estate
property that you considered is a wise decision. You will be working on this assignment
in a group of four to six students. The assignment is due on or before December 1st at
5:00 p.m. EST. By that time you should submit an electronic copy (via email) of your
assignment. If you turn your assignment late, 10% will be deducted from your grade for
every calendar-day delay. Additionally, if you are a face-to-face student, your team will
give a 10-minute class presentation summarizing the findings of the report.
Your complete assignment should read and look like a professional report and include
the following sections:
1. Short introduction – Tell the reader what she/he is about to read.
2. Property description – Identify and describe an income producing property that you would be able to purchase with a down payment of any amount and the
remainder will be financed. You are expected to hold this investment for eight
years. You can evaluate any property you would like, and you are not limited to a
specific location. I recommend using a website such as www.Loopnet.com to
search for your property.
3. Assumptions – Make reasonable assumptions about the NOI growth rate, terminal growth rate, mortgage interest rate, required rates of returns, down payment and
terminal cap rate (derived from assumptions on treasury rates, risk premium and
CAP over/below market). All assumptions must be justified within the report. To
construct your assumptions, you are encouraged to use your class notes,
documents from the course’s website and the internet. (You may assume without
justification that selling expenses are 4% and closing costs are 2.5% of the
purchase price. You may also assume financing with a 20-year fully amortized
fixed rate loan and DCR of no less than 1.3). For this project you may assume that
the NOI reported by the seller (or the implied NOI reported, given the asking
price and the reported CAP) is correct and no due diligence is required.
4. Before-tax expected return – Using an Excel spreadsheet, determine the expected levered-before-tax-annual rate of return on your capital. Also, you need to
determine the portion of the return that is expected from the annual cashflows and
the portion that is expected as a result of property price appreciation.
5. Max price – Based on the scenario above, calculate the absolute maximum price you are willing to pay for the property. Obviously, you will never tell this to the
seller, but it is important to have this number in mind when/if you are ready to
negotiate the price you pay for the property.
6. Sensitivity analysis – Consider and analyze two additional scenarios (one optimistic scenario and one pessimistic scenario). In each scenario you will need
to change the NOI and/or NOI growth and/or the terminal CAP rate. You will
need to articulate the reasons for the possible changes and their magnitude.
7. Conclusion – Summarize your findings. Do you think that you should commit your hypothetical funds to invest in this income producing property?
Note: Snapshots of all Excel spreadsheets and calculations used to derive your result
should be included within your report.
Deliverables:
ONE Excel file of the spreadsheets and ONE PDF file including text and snap
shots from your Excel spreadsheet. The PDF file should be organized as a
complete and well flowing report. These files should be submitted on or before
December 1st, 2020.
ONE PowerPoint file to be presented in class (for F2F students) or via Zoom (for
online students) on December 1st, 2020. The presentation should take no longer
than 10 minutes and followed by a brief Q&A session. All members of the group
must participate in the presentation or the Q&A session.
Your assignment files should be named as the following: “Representative’s name
– Proj2_Excel”, “Representative’s name – Proj2_Text” and “Representative’s
name – Proj2_PP”
Grading criteria:
Following the project guidance: 5%
Please make sure that your report follows the description provided above,
including the names of files submitted and the material included in each section.
Professionalism and clarity: 5%
Pictures of the properties, margins, spacing, and fonts have been chosen to make
the document attractive and easy to read. Tables, figures and graphs have been
used to summarize data and effectively illustrate points. Headings are used
judiciously to help reader find key sections in longer reports. Use a table of
content and reference to page numbers and/or appendices throughout the report.
Main Excel findings should be highlighted. It should look like a professional
report. Contains few typographical errors and is well-printed.
Be brief and clear! The total length of the report must not exceed 10 pages.
Section 1: 5%
Section 2: 10%
Section 3: 16%
Section 4: 16%
Section 5: 10%
Section 6: 10%
Section 7: 8%
Power Point & Presentation: 15%