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Edward Alexander is a young and inexperienced real estate investor. In 1999, he decides to invest his $80,000 inheritance in a four-unit brownstone in the Beacon Hill area of Boston, MA. The case study describes his process of spotting, evaluating, and purchasing the building located at Revere Street.
Segel, Arthur I., William J. Poorvu
Harvard Business School Case (800147-PDF-ENG)
Nov 10, 1999
Case questions answered:
- What market research and planning would you do if you are looking to buy a small apartment building like the one in Revere Street? What are the most important factors you would focus on?
- What were some mistakes Edward Alexander made in his basic assumptions and approach to this investment?
- Prepare a financial analysis.
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Case answers for Revere Street
This case solution includes an Excel file with calculations.
1. What market research and planning would you do if you are looking to buy a small apartment building like the one in Revere Street? What are the most important factors you would focus on?
If I am looking to buy a small apartment building like the one in Revere Street, I will do the following:
- Selecting a market: I would try to find and select 1-2 promising markets based on available socioeconomic data and statistical data.
- Supply: Then, I would analyze the currently existing inventory of the choosing housing markets.
- Planned properties, properties under construction, or properties that could be converted are all supply alternatives, which could affect the condition of the chosen market.
- A study of housing permits could be an additional valuable indicator of the future inventory of the market.
- Demand: Here, I would look at the current occupancy and absorption of the chosen markets.
- Are apartment buildings in Revere Street in demand? How many units are currently occupied? How does the occupancy change over a certain period of time?
- Property selection: After having selected the most promising market, I would then select specific properties, which fit both my general interest (type of building) and my price range.
- Expert interviews (e.g., real estate, financial, legal): Input by experts is then highly valuable. I would try to enrich my perspective with specialist opinions.
- Neighborhood interviews: Talking to people who actually live in the neighborhood would be my next step. What are the quirks of the locality? Are there any hot tips or things I should know?
- Feasibility study: Then, I would create a shortlist of properties and compare the cost versus the value of any shortlisted project (by developing the properties’ financial setups).
Most important factors:
- Real Estate Market Research
- Location, Location, Location
- Benchmarking: Checking other properties in the locality
- Input by experts
- Feasibility study
- Solid financing strategy
Lastly, patience, practicality, and planning are highly important. One always has to act patiently and wisely. Decisions made in a rush are mostly very risky as one is likely to overlook critical factors of the deal.
2. What were some mistakes Edward Alexander made in his basic assumptions and approach to this investment?
In the following, I have sorted the mistakes that Edward Alexander made in his basic assumptions and approach to this investment in Revere Street by an important order, starting with the most serious mistakes:
5% vacancy allowance: As the building will undergo some serious renovation 5% of vacancy allowance is not realistic. During construction, apartments won’t be (at least partially) usable, later follow-up renovations will be…
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