Final Project Instructions

August 9, 2020

Since Bb is down this weeks, it seems like a good time to provide details on the final project. Feel free to submit a comment (use the form at the bottom of this post) so I can respond to questions for all to see.

I’ve broken the project into 2 pieces. The first piece is essentially a rough draft and counts toward your regular assignment for Module 7. The second piece is the final product and the presentation.

Assignment 7: Investment Proposal Presentation Outline (80 points)

1. Identify a commercial investment property
   1. No Single Family homes
   2. Multifamily Residential (Apartment Building) is preferable
   3. Office or Retail or other commercial is okay with permission
   4. Minimum 10 units
2. Prepare a PowerPoint presentation you will use to pitch to investors 
   1. Include a valuation estimate 
   2. Include a complete ROI analysis
   3. Include estimate of up-front capital required

Assignment 8: Final Project Presentation (200 points)

1. Preferred: Present your investment proposal live (10-15 min) during a Zoom conference (date/time TBD), or
2. Optional (if #1 isn’t possible): Record a video presentation.
   1. Video quality isn’t terribly important. Your phone camera/recorder is sufficient. The video doesn’t need annotation or professional touch ups.
   2. Audio quality IS important – I must be able to understand you
3. Files to submit
   1. PowerPoint File
   2. ROI Analysis spreadsheet
   3. Video (if applicable)

So, Step 1 is to identify your commercial property. It should be listed for sale. These properties are more difficult to find. You won’t find them on Zillow. Some are listed on the MLS but some aren’t. Instead, you’ll have to use a website like LoopNet. There may be other good websites. Let me know if you find a good one!

Step 2 is valuation. The reason multifamily residential is preferred is because it’s fairly straight forward to estimate value. If you choose a different type of commercial real estate the valuation step may be trickier.

Valuation metrics for multifamily residential:

• Video Explanation
• Price per unit
  • Simply divide asking price by number of units
  • For example, if a 20-unit building is listed for $1,000,000
  • Price per unit = $1,000,000/20 = $50,000 per unit
• Gross rent multiplier
  • Estimate annual rent (monthly rent per unit x units x 12 months)
  • Divide list price by annual rent
  • For example, if a 20-unit building generates $725 per unit
  • Monthly rental income is $725 x 20 = $14,500
  • Annual rental income is $14,500 x 12 months = $174,000
  • Gross rent multiplier is $1,000,000/$174,000 = 5.7 (rounded)
• Cap rate (capitalization rate)
  • This is the most commonly used metric, at least among commercial real estate agents and brokers
  • It’s similar to Gross Rent multiplier but based on net income
  • You calculate net income by estimating annual rent and annual expenses, but typically without cost of mortgage financing.
  • Let’s say the 20-unit building costs $8,000 per month to run and maintain. So, annual operational expenses = $96,000
  • Net income is then $174,000 – $96,000 = $78,000
  • Cap rate = $78,000/$1,000,000 = 7.8%
• Your Final Project submission and presentation should include each of these three valuation metrics.

Step 3 is ROI analysis. It’s basically the same deal as the single family ROI analysis you already completed. But some of the numbers may be more challenging to estimate. Don’t worry. I’ll help.

I’ll provide more details here as we go along.

Questions? Submit below.