Cricket Road
Question 1) How and why does Sexton change his initial plan over time?
The initial plan of Sexton was to tear down the old house and erect an apartment building of 14 units, and the initial Characteristics were:
Average 1000 Sf. Per unit
Each unit has its own kitchen and bathroom
Use of concrete decking planks and brick-bearing walls
Large bedrooms with enough closet space for at least two people
To build all bathrooms, kitchens and facilities to withstand maximum wear and tear while requiring the least possible amount of maintenance
Make the apartments as attractive, airy, convenient and luxurious as possible.
Because of a new cost estimate that was much higher than the initial one, Sexton had to change some of the characteristics of the initial plan. Changes that have been made are:
Change from the 8’4’’ ceilings to 8ft
Use cheaper oversized bricks rather than standard brick.
Eliminate all the ceramic tile work
Remove all the dishwashers and garbage disposal units and make them optional on a rental basis.
Replace the initial electric switches with ones costing less.
Move the position of light boxes in order to use less electric cables
Make kitchens smaller by 1.5 feet and switching to lower-grade cabinets.
Question 2) How does Sexton’s expected return on his investment change as his setup is revised over time?
In the Preliminary pro forma income and expense statement of the new plan, it appears that Sexton is expecting a net operating income of $90,034. The required equity investment is of $220,000 ($70,000 in cash and $150,000 through the land) and the loan from the bank is of $630,000 with a mortgage constant of 9.67% resulting in a debt service of $60,921 (630,000 x 0.0976).
Having said this, it appears that the CFAF is equal to $29,113 resulting in a return on investment (or equity) of:
ROI= 29,113/220,000 = 13.2%
In the revised setup, that considered the new construction costs and a 25% expense ratio, it appears that Sexton is expecting a CFAF of $14,630.
The initial plan of Sexton was to tear down the old house and erect an apartment building of 14 units, and the initial Characteristics were:
Average 1000 Sf. Per unit
Each unit has its own kitchen and bathroom
Use of concrete decking planks and brick-bearing walls
Large bedrooms with enough closet space for at least two people
To build all bathrooms, kitchens and facilities to withstand maximum wear and tear while requiring the least possible amount of maintenance
Make the apartments as attractive, airy, convenient and luxurious as possible.
Because of a new cost estimate that was much higher than the initial one, Sexton had to change some of the characteristics of the initial plan. Changes that have been made are:
Change from the 8’4’’ ceilings to 8ft
Use cheaper oversized bricks rather than standard brick.
Eliminate all the ceramic tile work
Remove all the dishwashers and garbage disposal units and make them optional on a rental basis.
Replace the initial electric switches with ones costing less.
Move the position of light boxes in order to use less electric cables
Make kitchens smaller by 1.5 feet and switching to lower-grade cabinets.
Question 2) How does Sexton’s expected return on his investment change as his setup is revised over time?
In the Preliminary pro forma income and expense statement of the new plan, it appears that Sexton is expecting a net operating income of $90,034. The required equity investment is of $220,000 ($70,000 in cash and $150,000 through the land) and the loan from the bank is of $630,000 with a mortgage constant of 9.67% resulting in a debt service of $60,921 (630,000 x 0.0976).
Having said this, it appears that the CFAF is equal to $29,113 resulting in a return on investment (or equity) of:
ROI= 29,113/220,000 = 13.2%
In the revised setup, that considered the new construction costs and a 25% expense ratio, it appears that Sexton is expecting a CFAF of $14,630.