FIN 530 – Real Estate Investment-Order now from

FIN 530 – Real Estate Investment-Order now from
1Apartment Investment Opportunity: 20221byCharles H. WurtzebachABSTRACT. The purpose of this case is to present the challenges facing individual, taxable investorswhen evaluating multiple investment opportunities. Many individual investors rely on investmentadvisors or local brokers to source and underwrite investment opportunities. While each individualinvestor typically has varying investment goals and objectives driven by their individual financialcircumstances, an analyst can develop a sound approach for evaluating investment opportunities. Inthis case, a local broker who has worked previously with several family members over the years haspresented three Chicago area apartment investment opportunities to two cousins. Issues related to theinvestors overall real estate targeted total return and risk appetite, property performancecharacteristics, and market demographics all play a role in the analysis and will impact the finalrecommendation.FOCUSNot unlike major institutional real estate investors, individual investors look to real estate to deliverspecific performance characteristics to their overall portfolio. These characteristics include enhancedrisk-adjusted total returns, attractive current income, effective asset class diversification, and a hedgeagainst unexpected inflation. The present case highlights these issues and the challenges associatedwith developing a coherent asset level investment analysis. Of particular interest are the challengesresulting from evaluating multiple available investment opportunities. In addition, these decisions mustbe made within the constraints of changing market conditions and varying investor goals andobjectives.SETTINGJosh Wainright, an investment advisor, is based in Chicago, Illinois, the home of many members of theDuPage family. In January 2022 his attention focused on the needs of two cousins at different stages oftheir lives. Ron DuPage recently sold his business to a medium-sized public company in exchange for$25 million of the companys stock. He then retired and expected to live comfortably on the $500,000in dividends paid on the stock plus retirement and other income he had of an equal amount. Ron andhis wife Carol, a retired school teacher, plan on traveling extensively and visiting their grandchildrenregularly in California. Ron is 68 years old and his wife Carol is 65.Ron feels the need to diversify his investments, however, and plans to sell up to half his stock andreinvest in real estate and other investments. Even though the basis in the stock was negligible, he feelsthat now would be a good time to take advantage of the current tax law and pay his capital gains at the15% rate before, as many fear, Congress increases the capital gains rate further.1 This case includes the analysis of current market conditions, three apartment properties in widely differentsubmarkets of a major metropolitan area with particular focus on risk, market, rent analysis and the use ofcommercial data providers. This current version has been updated from the earlier 2016, 2019, and 2021 versions.
2Rene DuPage is president and sole stockholder of a small-sized paper company that had earned inexcess of $3 million before taxes and $2 million after taxes in each of the previous five years. She hasreceived many offers to sell her company in exchange for the stock of a public company; but sheenjoyed the independence of running her own business. She has determined that her paper businesscould best grow through internal expansion rather than by acquisition. On the other hand, she did feel itwise to diversify her own investments. Over time, she has accumulated over $16 million now invested inshort-term securities, which she considered unnecessary for her present operations and thus availablefor outside investment. Rene is 55 years old and plans to work another 15 years or so. She is currentlyunmarried and has no children. Her interests include golf, travel, and the arts.Both Ron and Rene feel that real estate would give them the benefits of an attractive current incomeand total return, diversification, protection from unexpected inflation, and some tax advantages.Each wants to purchase a property large enough to attract future buyers when it becomes time forthem to sell. They have seen what a shutdown in the commercial mortgage market had done toproperty values during 2007-09 and recognize the liquidity risk associated with commercial realestate investment. They are also aware that the impact of the COVID-19 pandemic has affectednear-term real estate performance. While early in 2020 the real estate market suffered asunemployment rose and before an effective vaccine was widely available, by late 2020 and 2021the market not only recovered but prices took off in many markets. This was particularly true asapartment tenants migrated out of downtown markets to less urban, more suburban markets.In the short-term, the circumstances may present a buying opportunity. To compensate for thesecurrent risks, the DuPages want a minimum after-tax leveraged return on their investments of 12%.Other important factors for the DuPage’s were the surrounding demographics. In the Chicago area,the demographics of a neighborhood can change dramatically block-to-block and it was important forthe DuPages to invest in a property that would be in constant demand. Josh found the website SiteTo Do Business ( extremely useful in identifying adequate areas that might suitthe DuPages requirements.Josh Wainright has worked with the DuPage family for many years and has located three propertiesthat he feels might be suitable investments for his two clients, either in partnership or individually. Hehad brokers show the properties to Ron and Rene DuPage and both of the DuPages were enthusiasticabout them. A licensed commercial real estate broker in Illinois, Josh expects to split the sellingcommission associated with any property the DuPages invest in.The following memo from Josh to Ron and Renee presents his investment pitch.
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