McKenzie Investments

Lacey McKenzie
AGEC 330 - 502
April 2, 2014

Table of Contents
Executive Summary ............................................................................................................................................................ 1
About our Investment ........................................................................................................................................................ 2
Land .................................................................................................................................................................................. 2
Our Houses ..................................................................................................................................................................... 2
Management Plan................................................................................................................................................................ 4
Tenants ............................................................................................................................................................................. 4
Insurance.......................................................................................................................................................................... 4
Repairs & Maintenance ................................................................................................................................................. 4
Utilities & Other Costs .................................................................................................................................................. 4
Lease Terms .................................................................................................................................................................... 4
Investment Analysis............................................................................................................................................................ 6
Income Projection .......................................................................................................................................................... 6
Three-Bedroom House ............................................................................................................................................. 6
Four-Bedroom House............................................................................................................................................... 6
Pet Deposits................................................................................................................................................................ 6
Total Income .............................................................................................................................................................. 6
Expense Projection ........................................................................................................................................................ 6
Analysis ............................................................................................................................................................................ 7
TABLE 1: Layout of Cash Flows ........................................................................................................................... 7
FIGURE 1: Internal Rate of Return....................................................................................................................... 7
TABLE 2: Net Cash Flows After Debt ................................................................................................................. 8
Recommendations .............................................................................................................................................................. 8

Executive Summary
After much discussion and heated debate, McKenzie Investments has decided to make a heavy
investment in the real estate sector. McKenzie Investments is made up of the siblings of the
McKenzie family and their spouses, we are combining our capital and are hoping to buy houses in
the Bryan/College Station area for college students and/or families. As Texas A&M University and
Blinn College keep growing, students are in need of more housing options. Likewise, with the
university growing, more and more people are being hired each year new families are moving to
the Bryan/College Station area and housing options are limited. We would like to buy houses with
upgraded appliances and lavish finishings to make the students and families feel welcome. McKenzie
Investments would offer two different floor plans two three-bedroom floor plans and 3 fourbedroom floor plans.
Weve strategically chosen a location with many things to consider. Our houses are located within
the College Station School District; however the utilities are serviced by Bryan utilities which are
considerably cheaper than paying for College Station Utilities. With our houses located just fifteen
minutes away from Texas A&M campus and twenty-five minutes away from Blinn Campus, our area
offers some peace and quiet. The price of the land and property taxes are also more reasonable in
this area which in turn makes our rental rates lower for our tenants.
We stand to make a revenue of $173,600.00 per year and our annual expenses add up to $84,750.00
profit of $88,850.00. A quick summary from our cash flows shows that this investment would be
profitable with a net present value of $132,970.00. With the combination of capital among the
McKenzie siblings and spouses, we have come up with a down payment of $155,000.00 roughly
$25,833.33 per sibling and spouse. We discussed and planned out our net cash flows after debt and
have determined that our investment is financially feasible.

About our Investment

Land
McKenzie Investments would like to buy houses out on the land at River Ridge road a
comfortable fifteen minute drive to Texas A&M campus and twenty-five minute drive to Blinn
campus. This would also be an ideal housing location for students and families as it is located just
inside the College Station School District.
We chose this area because the price of land is lower and the property taxes are reasonable. Also, the
land we have chosen does not have College Station Utilities which are costly in price our houses
would be serviced by Bryan utilities which are much more reasonable.

Our Houses
McKenzie Investments has chosen to buy five properties costing us only $955,000.00. We want our
lessees to be comfortable and feel as if they have their own space to kick back and relax. We will
offer two great floor plans featuring a three-bedroom and four-bedroom options. There would be
two three-bedroom houses (2025sq. feet):

Master bedroom
Two additional bedrooms
Three and a half bathrooms
Laundry room
Kitchen/Dining room combo
Living room
Two car garage

The remaining three houses will have a four-bedroom floor plan (2500sq. feet):

Master bedroom
Three additional bedrooms
Four and a half bathrooms
Laundry room
Kitchen/Dining room combo
Living room
Two car garage

McKenzie Investments will have hardwood floors in the living room and dining room, tile in the
kitchen and bathrooms, with the remaining areas having carpet. The kitchen will feature marble
countertops with a stainless steel cooking range, microwave, and refrigerator. McKenzie
Investments will also furnish the washer and dryer for each house. The backyards will have a privacy
fence with access to the river behind the property and also a wooden deck.

We want our properties to be appealing to our future lessees. Our goal is to make our tenants feel at
home. By offering top of the line appliances and providing expert customer service we hope to
make our future tenants we can only hope they love our properties so much they want to lease them
out multiple years in a row.

Management Plan
Tenants
To find tenants and keep our units fully occupied, McKenzie Investments will depend on our
chosen realtor company of choice. McKenzie Investments will pay the fee required to the firm to
handle all paperwork and advertisement.
The maximum number of tenants per house depends on the situation. Students leasing the property
will be allowed one person per bedroom with guest stay not exceeding one week at a time. Students
leasing the property will also have to provide a guarantor at least one per lease if not more.
Families leasing the properties will be allowed no more than two individuals per bedroom.

Insurance
McKenzie Investments will pay insurance on the house structure and property including furnished
appliances. McKenzie Investments is not liable for any personal injury on property. Tenants are
expected to have renters insurance in case of natural disasters, floods, fires, etc. we are not
responsible for damaged belongings of tenants.

Repairs & Maintenance

Tenants are responsible for all maintenance excluding burst pipes and repairs on furnished
appliances. All other maintenance issues are to be taken care of by the tenant.

Utilities & Other Costs

Tenant is responsible for all utility costs including but not limited to:

Electricity
Trash
Sewage
Water
Internet
Cable
Alarm/Security System (optional)

Electricity, water, trash, and sewage are to be done through Bryan Utilities. Upon moving into the
property, the tenants are required to provide a letter proving they have had the utilities turned on.

Lease Terms
All houses will have the following lease terms:

Neither the property nor any part of the property will be used at any time during the term of
the lease by tenants for the purpose of carrying on any business, profession, or trade of any
kind, or for any purpose other than as a private residence.

No guests of the tenants may occupy the property for longer than one week at a time
without the prior written consent of McKenzie Investments.
Only properly insured motor vehicles may be parked on the property.
Each lease is a yearlong, starting August 1st at 4:00p.m. and ending July 31st at 12:00p.m.
The tenant(s) will pay the rent on or before the beginning of each month the tenant(s) has
until the fourth of each month to pay the rent. There is an additional $15 charge for each day
after that. Rent payments are to be made with one check payable to McKenzie Investments.
A security deposit is due at the signing of the lease. A portion of the deposit will be returned
at the end of the lease.
Deductions from the security deposit may include:
o Repair of walls due to plugs, nails, or any unreasonable number of holes in the walls
including the repainting of damaged walls;
o Repainting required to repair the results of any other improper use or excessive
damage by the tenant
o Unplugging toilets, sinks and drains;
o Replacing damaged or missing doors, windows, screens, mirrors or light fixtures;
o Repairing cuts, burns, or water damage to floors;
o Any other repairs or cleaning due to any damage beyond normal wear and tear
caused or permitted by the tenant or by any person whom the tenant is responsible
for;
A maximum of four pets are allowed to be kept at the property at one single given time.
Each animal will have to be discussed with McKenzie Investments and must be approved.
There is a deposit per pet and any damages caused by the pet must be taken care of by the
lessee before the end of the lease.
On execution of the lease, the tenant will pay the landlord a pet deposit of $300.00 per pet
with $200.00 being returned at the end of the lease depending on further damages.
During the term of this lease or after its termination, the landlord may charge the tenant or
make deductions from the pet deposit for any or all of the following:
o Damage or losses suffered to the property or surrounding property caused by any
pets owned by the tenant or allowed on the property by the tenant; and
o Damage or losses suffered to the Property or surrounding property due to flea
infestation caused by any pets owned by the tenant or allowed on the property by the
tenant.
Other terms and conditions may apply.

Investment Analysis
Income Projection
Three-Bedroom House
Monthly:
Security Deposit:
Monthly Rent:
$2,500.00
Deposit Paid Back:
Income per
House:
Both Houses:

Total:
$1,800.00
$30,000.00
($900.00)
$30,900.00
$61,800.00

Four-Bedroom House
The monthly rent will be $3000.00 with a security deposit of $2200.00.
Each house will generate a yearly income of $37,100.00 monthly rent and half the deposit.
All three houses will generate a yearly income of $185,500.00.
Monthly:
Security Deposit:
Monthly Rent:
$3,000.00
Deposit Paid Back:
Income per
House:

Total:
$2,200.00
$36,000.00
($1,100.00)
$37,100.00

All Three
Houses:

$111,300.00

Pet Deposits
McKenzie Investments will assume each house will have one pet each. The pet fee is $300. 00 per pet
and $200.00 will be returned at the end of the lease. An additional $500. 00 will be made each year.
Total Income
Altogether, McKenzie Investments stands to earn $173,600.00.

All prices are subject to change due to inflation this is the first years prediction.

Expense Projection
Expenses Include:

Realtor Company - $7000.00 per year.

Property Taxes - $47,750.00.
Insurance Expense - $30,000.00

Total Expenses: $84,750.00.

All prices are subject to change due to inflation this is the first years prediction.

Analysis
All the houses will cost a total of $955,000.00. We stand to make a revenue of $173,600.00 per year,
with yearly expenses adding up to $84,750.00. The IRS will allow you to depreciate your investment
over 27.5 years (http://www.zillow.com/blog/rental-property-depreciation-144131/). McKenzie
Investments plans to sell the property at the end of 20 years for $700,000.00. The expected rate of
inflation is 3% per year. We anticipate the marginal tax rate over the next 20 years to be 15%.
McKenzie Investments requires at least a 10% pre-tax rate of return on capital. The bank will loan
McKenzie Investments $800,000.00. The loan will be fully amortized over 25 years at 10% (annual
payments) the outstanding balance of the loan will be paid at the end of the twentieth year.

TABLE 1: Layout of Cash Flows

Period
Component
Cost
NR(1-m)
mD
TVat
NCF

PV
-$955,000
$914,640
$49,295
$124,034
$132,970

0
-$955,000

-$955,000

18

19

20

$75,775
$5,209

$78,048
$5,209

$80,389
$5,209

$125,244
$5,209

$129,001
$5,209

$80,984

$83,257

$85,598

$130,453

$134,210

$132,871
$5,209
$634,068
$772,148

NPV

FIGURE 1: Internal Rate of Return

450,000
400,000
350,000
300,000
250,000
200,000
150,000
100,000
50,000
0
-50,000
-100,000

6%

8%

9%

DISCOUNT RATE

12%

The NPV = $132,970.00

The IRR =9.7012%
Sensitivity:

Revenues = $173,600.00
Expenses = $84,750.00

TABLE 2: Net Cash Flows After Debt

Component
NCF
L0
LPMT
m*I
LN

0
-$955,000
$800,000

NCFad

-$155,000

1
$82,997

2
$85,331

Period
3
$87,735

-$88,134
$12,000

-$88,134
$11,878

-$88,134
$11,744

-$88,134
$7,053

-$88,134
$6,436

-$88,134
$5,758
-$334,099

$6,863

$9,074

$11,344

$52,699

$55,940

$359,204

18
$133,781

19
$137,638

20
$775,679

Need a down payment of $155,000.00.

If we are able to generate the projected revenue, our investment is finically feasible.

Recommendations
McKenzie Investments has made the decision to invest in the real estate sector in College Station.
We hope to provide students and families with houses with upgraded appliances and lavish
furnishings. We will offer two different floor plans either a four bedroom/four bathroom floor
plan or a three bedroom/three bathroom floor plan. We strategically chose a location with many
things to consider; the utility costs are lower, just inside the College Station school district, and
property taxes are lower. All this means our tenants will pay a lower rate. Going over our projected
cash flow statements, the investment is both profitable and financially feasible. McKenzie
Investments has decided to invest.