Apartment Investment Opportunity: 20221
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
investor’s 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
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
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 company’s 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.
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 DuPage’s 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 DuPage’s 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 DuPage’s 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 DuPage’s were enthusiastic
about them. A licensed commercial real estate broker in Illinois, Josh expects to split the selling
commission associated with any property the DuPage’s invest in.
The following memo from Josh to Ron and Renee presents his “investment pitch.”