A 30-unit apartment building should last 35 years, when it will need to be either replace or undergo major renovation. Assume the building’s value at 35 years will be 10% of its construction cost. Assume it will be sold, and that the land’s cost will be recovered in full.

$3.2 Million                 Land

$4.8 Million                 Building

$850,000                     Annual operating and maintenance

6%                               Annual property taxes and insurance (% of initial investment)

12%                             Vacancy rate

a. If the owner wants a 15% rate of return, what is the required monthly leasing cost for each unit?

b. If turning 2 units into an exercise facility would decrease the vacancy rate by 5%, would that be a good decision?