Suppose you are buying a beach house condo for $450,000. You are planning to finance the...

Suppose you are buying a beach house condo for $450,000. You are planning to finance the ENTIRE amount of the condo via a mortgage for 30 years, 5% fixed, 0-points. The HOA fees, property taxes, Annual maintenance + Upkeep of the condo = $12,000 per year. Utilities are $150/month You are planning to rent this condo, and your rental income is $40,000 per year (gross), which goes up by 2% per year. Expenses to rent out the property are 30% of the gross income per year. Since this is an investment property, you will be depreciating it under residential rental property with 27.5 years depreciation. Assume that the condo will appreciate by 3% annually. 1. Provide a detailed calculation representing the annual schedule of income, expenses, depreciation, taxable income for this investment, and property appreciation. 2. If your MARR is 5%, determine if this is a good investment based on TAXABLE INCOME and APPRECIATION only. Find the IRR for this investment. Please, state all assumptions and show all your work.

Expert Solution

Requirement a :
Schedule of income, expenses, taxable income
Year	0	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16	17	18	19	20	21	22	23	24	25	26	27	28	29	30
Value of condo	450000	463500	477405	491727.2	506479	521673.3	537323.5	553443.2	570046.5	587147.9	604762.4	622905.2	641592.4	660840.2	680665.4	701085.3	722117.9	743781.4	766094.9	789077.7	812750.1	837132.6	862246.5	888113.9	914757.4	942200.1	970466.1	999580.1	1029567.5	1060454.5	1092268.1

Income		40000	40800	41616	42448.32	43297.29	44163.23	45046.5	45947.43	46866.38	47803.7	48759.78	49734.97	50729.67	51744.27	52779.15	53834.73	54911.43	56009.66	57129.85	58272.45	59437.9	60626.65	61839.19	63075.97	64337.49	65624.24	66936.72	68275.46	69640.97	71033.79
Expenses		-12000	-12000	-12000	-12000	-12000	-12000	-12000	-12000	-12000	-12000	-12000	-12000	-12000	-12000	-12000	-12000	-12000	-12000	-12000	-12000	-12000	-12000	-12000	-12000	-12000	-12000	-12000	-12000	-12000	-12000
Utilty expense [ 12 x 150 ]		-1800	-1800	-1800	-1800	-1800	-1800	-1800	-1800	-1800	-1800	-1800	-1800	-1800	-1800	-1800	-1800	-1800	-1800	-1800	-1800	-1800	-1800	-1800	-1800	-1800	-1800	-1800	-1800	-1800	-1800
Cost @102%		-12000	-12240	-12484.8	-12734.5	-12989.19	-13248.97	-13513.95	-13784.23	-14059.91	-14341.11	-14627.93	-14920.5	-15218.9	-15523.28	-15833.75	-16150.4	-16473.43	-16802.9	-17138.95	-17481.73	-17831.37	-18188	-18551.76	-18922.79	-19301.25	-19687.27	-20081.02	-20482.64	-20892.29	-21310.14
Dep.		-16363.64	-16363.6	-16363.64	-16363.64	-16363.64	-16363.64	-16363.64	-16363.64	-16363.64	-16363.64	-16363.64	-16363.6	-16363.64	-16363.64	-16363.64	-16363.6	-16363.64	-16363.64	-16363.64	-16363.64	-16363.64	-16363.64	-16363.64	-16363.64	-16363.64	-16363.64	-16363.64
Interest @5%		-22500	-22161.3	-21805.75	-21432.38	-21040.34	-20628.7	-20196.48	-19742.65	-19266.12	-18765.77	-18240.41	-17688.8	-17109.55	-16501.37	-15862.78	-15192.3	-14488.22	-13748.97	-12972.76	-12157.74	-11301.97	-10403.42	-9459.93	-8469.27	-7429.07	-6336.87	-5190.06	-3985.9	-2721.54	-1393.96
Taxable income		-24663.64	-23765	-22838.19	-21882.2	-20895.88	-19878.08	-18827.57	-17743.09	-16623.29	-15466.82	-14272.2	-13037.9	-11762.42	-10444.02	-9081.02	-7671.59	-6213.86	-4705.85	-3145.5	-1530.66	140.92	1871.59	3663.86	5520.27	7443.53	9436.46	11502	30006.92	32227.14	34529.69

Loan calculation
Year	0	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16	17	18	19	20	21	22	23	24	25	26	27	28	29	30
Principle		450000	443226.9	436115.1	428647.7	420806.9	412574.1	403929.7	394853	385322.5	375315.5	364808.1	353775.4	342191	330027.4	317255.6	303845.2	289764.4	274979.4	259455.3	243154.9	226039.5	208068.3	189198.6	169385.4	148581.5	126737.4	103801.1	79718.04	54430.79	27879.19
EMI		29273.15	29273.15	29273.15	29273.15	29273.15	29273.15	29273.15	29273.15	29273.15	29273.15	29273.15	29273.15	29273.15	29273.15	29273.15	29273.15	29273.15	29273.15	29273.15	29273.15	29273.15	29273.15	29273.15	29273.15	29273.15	29273.15	29273.15	29273.15	29273.15	29273.15
Interest		22500	22161.34	21805.75	21432.38	21040.34	20628.7	20196.48	19742.65	19266.12	18765.77	18240.41	17688.77	17109.55	16501.37	15862.78	15192.26	14488.22	13748.97	12972.76	12157.74	11301.97	10403.42	9459.93	8469.27	7429.07	6336.87	5190.06	3985.9	2721.54	1393.96
Principle deduction		6773.15	7111.8	7467.39	7840.76	8232.8	8644.44	9076.66	9530.5	10007.02	10507.37	11032.74	11584.38	12163.6	12771.78	13410.37	14080.88	14784.93	15524.17	16300.38	17115.4	17971.17	18869.73	19813.22	20803.88	21844.07	22936.28	24083.09	25287.24	26551.61	27879.19
Principle due		443226.85	436115.1	428647.7	420806.9	412574.1	403929.7	394853	385322.5	375315.5	364808.1	353775.4	342191	330027.4	317255.6	303845.2	289764.4	274979.4	259455.3	243154.9	226039.5	208068.3	189198.6	169385.4	148581.5	126737.4	103801.1	79718.04	54430.8	27879.18	0

Step 1 : calculation of EMI

Cost of house condo		450,000
Annual interestrate		5%		use PMT function to calculateEMI using the figures given
No of peiods[ years ]		30

EMI =		($29,273.15)	It is showing negative because, it is a outflow

Requirement 2 :

For calculaing the IRR, we need to add back the depreciation in the taxable income and find out the IRR using the funcion in excel

conclusion IRR is 12% , therefore it is a good investment as MARR is 5% only.

Year		1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16	17	18	19	20	21	22	23	24	25	26	27	28	29	30
Taxable income		-24663.64	-23765	-22838.19	-21882.2	-20895.88	-19878.08	-18827.57	-17743.09	-16623.29	-15466.82	-14272.2	-13037.9	-11762.42	-10444.02	-9081.02	-7671.59	-6213.86	-4705.85	-3145.5	-1530.66	140.92	1871.59	3663.86	5520.27	7443.53	9436.46	11502	30006.92	32227.14	34529.69
Dep.		16363.64	16363.64	16363.64	16363.64	16363.64	16363.64	16363.64	16363.64	16363.64	16363.64	16363.64	16363.64	16363.64	16363.64	16363.64	16363.64	16363.64	16363.64	16363.64	16363.64	16363.64	16363.64	16363.64	16363.64	16363.64	16363.64	16363.64
Total income		-8300	-7401.34	-6474.55	-5518.56	-4532.24	-3514.44	-2463.93	-1379.45	-259.65	896.82	2091.44	3325.71	4601.22	5919.62	7282.62	8692.05	10149.78	11657.79	13218.14	14832.98	16504.56	18235.23	20027.5	21883.91	23807.17	25800.1	27865.64	30006.92	32227.14	34529.69

IRR =	12%
Use IRR function in the excel to calculate IRR
= IRR ( select value from year 1 to 30 of total income ).

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