Greetings John, I have thoroughly assessed the various real estate ventures that you expressed potential interest in investing during our previous encounter.
According to my understanding, your investment profile includes a $9 million budget for real estate and other investments. It appears that you plan to invest around $5-$6 million (60% of the budget) in these projects. As a retired individual, you are seeking a passive investment with minimal risk. You are looking for diversification (medium-high), protection from inflation (3% increase in cash flow), tax advantages, and an expected minimum leveraged return of 12% after-tax. I have explored various qualitative and quantitative choices to optimize your investment.
The first step was deciding between a residential property and an office property. As per definition, a residential multifamily property is less risky tha
...n an office building due to the lower tenant volatility risk. Rent is the primary expense for families residing in these properties, making them more stable. Conversely, office rents depend on the company's health, which is beyond our direct control, and can pose greater risk due to fewer tenants. Additionally, if any tenants decide to break the lease in an office building, it can increase the risk.
To minimize risk in your investment, it is recommended to have a greater volume of tenants in a residential property. Therefore, the Allison Green and Ivy Terrace projects are suggested as they are residential properties. The Allison Green property has a 95% occupancy rate and was built in 2000, while the Ivy Terrace project is currently under construction and has a projected occupancy rate of 93%, guaranteed by contract for the next three years. As mentioned before, minimizing ris
is a priority in your investment profile. The Allison Green property is a well-suited and secure investment that meets your criteria and will be more profitable than the Ivy Terrace project, as shown in Exhibit C. You can expect a leveraged return after-tax (IRR) of 14.
Based on my sensitivity analysis, the project has a 93% success rate and a break even point at 65%. To achieve a minimum return of 12%, you can accommodate a vacancy allowance rate of almost 15%, allowing room for projected growth. Additionally, you will receive 18.35% tax benefits. With both qualitative and quantitative analyses in consideration, I recommend proceeding with the Allison Green project, which requires a cash investment of $3.
Analyzing the numbers of the 900 Stony Walk led me to believe that it presents another opportunity worth considering. By selling the property for $4 million, you would have $2.5-$3 million left to finance a new project and minimize risk.
Despite the increased risk involved, investing in real estate with your cousin can bring several benefits. It can help to diversify your real estate assets, which can lower your overall risk. Additionally, investing in this manner can potentially bring a 14.54% leveraged return after-tax, which could earn you tax benefits of 27% of your total benefits. By sharing the risk with your cousin, you can feel more reassured that the risk level will remain low, especially considering that the building has had an occupancy rate of 95% since 1998. For a more thorough analysis of this possible portfolio, please see Exhibit A, featuring Allison Green's 900 Stony Walk.
This display provides an overview of all the numbers that may pique your
interest. Don't hesitate to reach out to me if you need any clarification. Angus Cartwright III
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