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    Apartment Investment Opportunity: 20221
    by
    Charles H. Wurtzebach
    ABSTRACT. The purpose of this case is to present the challenges facing individual, taxable investors
    when evaluating multiple investment opportunities. Many individual investors rely on investment
    advisors or local brokers to source and underwrite investment opportunities. While each individual
    investor typically has varying investment goals and objectives driven by their individual financial
    circumstances, an analyst can develop a sound approach for evaluating investment opportunities. In
    this case, a local broker who has worked previously with several family members over the years has
    presented three Chicago area apartment investment opportunities to two cousins. Issues related to the
    investors overall real estate targeted total return and risk appetite, property performance
    characteristics, and market demographics all play a role in the analysis and will impact the final
    recommendation.
    FOCUS
    Not unlike major institutional real estate investors, individual investors look to real estate to deliver
    specific performance characteristics to their overall portfolio. These characteristics include enhanced
    risk-adjusted total returns, attractive current income, effective asset class diversification, and a hedge
    against unexpected inflation. The present case highlights these issues and the challenges associated
    with developing a coherent asset level investment analysis. Of particular interest are the challenges
    resulting from evaluating multiple available investment opportunities. In addition, these decisions must
    be made within the constraints of changing market conditions and varying investor goals and
    objectives.
    SETTING
    Josh Wainright, an investment advisor, is based in Chicago, Illinois, the home of many members of the
    DuPage family. In January 2022 his attention focused on the needs of two cousins at different stages of
    their 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 $500,000
    in dividends paid on the stock plus retirement and other income he had of an equal amount. Ron and
    his wife Carol, a retired school teacher, plan on traveling extensively and visiting their grandchildren
    regularly 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 and
    reinvest in real estate and other investments. Even though the basis in the stock was negligible, he feels
    that now would be a good time to take advantage of the current tax law and pay his capital gains at the
    15% 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 different
    submarkets of a major metropolitan area with particular focus on risk, market, rent analysis and the use of
    commercial data providers. This current version has been updated from the earlier 2016, 2019, and 2021 versions.

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    Rene DuPage is president and sole stockholder of a small-sized paper company that had earned in
    excess of $3 million before taxes and $2 million after taxes in each of the previous five years. She has
    received many offers to sell her company in exchange for the stock of a public company; but she
    enjoyed the independence of running her own business. She has determined that her paper business
    could best grow through internal expansion rather than by acquisition. On the other hand, she did feel it
    wise to diversify her own investments. Over time, she has accumulated over $16 million now invested in
    short-term securities, which she considered unnecessary for her present operations and thus available
    for outside investment. Rene is 55 years old and plans to work another 15 years or so. She is currently
    unmarried 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 income
    and 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 for
    them to sell. They have seen what a shutdown in the commercial mortgage market had done to
    property values during 2007-09 and recognize the liquidity risk associated with commercial real
    estate investment. They are also aware that the impact of the COVID-19 pandemic has affected
    near-term real estate performance. While early in 2020 the real estate market suffered as
    unemployment rose and before an effective vaccine was widely available, by late 2020 and 2021
    the market not only recovered but prices took off in many markets. This was particularly true as
    apartment 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 these
    current 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 for
    the DuPages to invest in a property that would be in constant demand. Josh found the website Site
    To Do Business (http://www.stdb.com/) extremely useful in identifying adequate areas that might suit
    the DuPages requirements.
    Josh Wainright has worked with the DuPage family for many years and has located three properties
    that he feels might be suitable investments for his two clients, either in partnership or individually. He
    had brokers show the properties to Ron and Rene DuPage and both of the DuPages were enthusiastic
    about them. A licensed commercial real estate broker in Illinois, Josh expects to split the selling
    commission 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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