A real estate broker is offering an apartment building for sale that has the following characteristics:...

A real estate broker is offering an apartment building for sale that has the following characteristics:
1. The asking price is $3.5 million with the land valued at $500,000.
2. The 160 apartment units rent for $250 per month with rent expected to increase by 4% per year starting in year 2.
3. Vacancy and bad debt allowance is 6% of the potential gross income each year.
4. Operating expenses are expected to be 32% of effective gross income each year.
5. The real estate agent estimates that the value of the property will be $4.4 million at the end of 5 year investment horizon.
6. A 12 percent, 20 year mortgage for $2 million is available with monthly payments.
7. The investment horizon is 5 years beginning January 2007 and ending December 2012. The investor’s ordinary income tax rate is 28 percent and his or her capital gain tax rate is 15%. The investor has several profitable real estate investments and can utilize any tax losses. The appropriate discount rate for this investment is 18%.

Calculate the relevant cash flows for this investment and apply the NPV and IRR rules to decide whether to pursue this project.

Expert Solution

Price = $ 3.5 + $0.5

= $ 4,000,000

Rent for the 1st year = $ 250*12*160

= $ 480,000

Vacancy and bad debt allowance for the 1st year = $ 480,000*0.06 = $ 28,800

Operating expenses for the 1st year = ($ 480,000 - $ 28,800)* 0.32 = $ 144,384

Mortgage Payments every year = {P[r(1+r)^n/((1+r)^n)-1)]} x 12

= $ 2,000,000 [ 0.12/12 (1 + 0.12/12)^240 / ((1 + 0.12/12)^240 -1)]

= $ 264,260.7

Year	Price of the property and land	Sales	Vacancy and bad debt allowance	Operating expenses	Mortgage Payments	Salvage of Property	Net Inflow Before Tax	Net Inflow After Tax	DCF @ 18%	NPV
0	40,00,000.00	-	-	-	-	-	-40,00,000.00	-40,00,000.00	1.00	-40,00,000.00
1	-	4,80,000.00	28,800.00	1,44,384.00	2,64,260.70	-	42,555.30	30,639.82	0.85	36,063.81
2	-	4,99,200.00	29,952.00	1,50,159.36	2,64,260.70	-	54,827.94	39,476.12	0.72	39,376.57
3	-	5,19,168.00	31,150.08	1,56,165.73	2,64,260.70	-	67,591.49	48,665.87	0.61	41,138.26
4	-	5,39,934.72	32,396.08	1,62,412.36	2,64,260.70	-	80,865.57	58,223.21	0.52	41,709.56
5	-	5,61,532.11	33,691.93	1,68,908.86	2,64,260.70	49,00,000.00	49,94,670.62	49,68,162.85	0.44	21,83,216.56
							IRR	5.25%		-16,58,495.22

As NPV is negative and Internal rate of return is less than required rate of return, the project is loss making and not feasible. Hence, it should be opt out.

Note: Capital gains tax is not taken into the calculations of the salvage value of the property as the same willbe set off woth other losses.

jeff jeffy answered 1 year ago

Assume you negotiated the sale as a real estate broker and are entitled to a six percent commission.

Assume you negotiated the sale as a real estate broker and are entitled to a six percent commission. The offer and acceptance contract calls for a sales price of $230,000. The buyer has tendered $2,000 for earnest money. The buyer has received loan approval on an 80% loan to value ratio loan. The property is presently encumbered with an existing mortgage with a balance of $150,691.73. The interest on the loan has been paid through April 30, 2019. The interest...

An apartment building has the following investment characteristics: Year 1 NOI $2,500,000

An apartment building has the following investment characteristics: Year 1 NOI $2,500,000 Year 2 NOI $2,600,000 Year 3 NOI $2,704,000 Year 4 NOI $2,812,000 You plan to purchase the asset at a 5% initial cap rate and to sell it 3 years later, also at a 5% cap rate. You plan to use a loan at 60% LTV to purchase the asset. The loan will be interest only (no amortization) at a 4% annual interest rate....

An investor has just inherited $605,000. A local commercial real estate broker has presented her with...

An investor has just inherited $605,000. A local commercial real estate broker has presented her with the following opportunity to purchase a small office building for $1,500,000. There are four existing leases: A bank rents the 9,500 square feet on the first floor for $10,500 per month with level payments for three more years. Thereafter, the bank is expected to renew for 10 years at $12,000 per month. An insurance company rents 6,200 square feet on the second floor for...

The published sale price of a small apartment building comparable sale was $245,000. The buyer had...

The published sale price of a small apartment building comparable sale was $245,000. The buyer had mostly non-reported income and could not qualify for a standard mortgage. He agreed to purchase the property for $245,000 with the seller taking back a purchase-money mortgage of $175,000 at 7 percent for 30 years with monthly payments and a balloon payment in six years. The market interest rate for a property like this at the time of sale was a 9 percent with...

9) Year of filing is 2017 1. Cindy, a real estate broker, had the following income...

9) Year of filing is 2017 1. Cindy, a real estate broker, had the following income and expenses in her business: Commissions income $180,000 And she also incurred the following expenses during the tax year: Referral fees paid to non-brokers for referrals (illegal under state law and subject to criminal penalties) 40,000 Property tax on the office 5,500 Office supplies 3,000 Alimony paid to her ex-husband 7,200 Mortgage interest paid on her residence 6,500 Office rental expenses 20,000 Office staff...

An apartment building has the following investment characteristics: Year 1 NOI $2,500,000 Year 2 NOI $2,600,000...

An apartment building has the following investment characteristics: Year 1 NOI $2,500,000 Year 2 NOI $2,600,000 Year 3 NOI $2,704,000 Year 4 NOI $2,812,000 You plan to purchase the asset at a 5% initial cap rate and to sell it 3 years later, also at a 5% cap rate. You plan to use a loan at 60% LTV to purchase the asset. The loan will be interest-only (no amortization) at a 4% annual interest rate. Answer the following: What is...

Draw a class diagram for a real estate firm that lists property for sale. The following...

Draw a class diagram for a real estate firm that lists property for sale. The following describes the organization: The firm has a number of sales offices in several states; location is an attribute of sales office. Each sales office is assigned one or more employees. Attributes of employee include employeeID and employeeName. An employee must be assigned to only one sales office. For each sales office, there is always one employee assigned to manage that office. An employee may...

A real estate agent wants to study the relationship between the size of an apartment and...

A real estate agent wants to study the relationship between the size of an apartment and its monthly rent price. The table below presents the size in square feet and the monthly rent in dollars, for a sample of apartments in a suburban neighborhood. Rent ($) 720 595 915 760 1000 790 880 845 650 748 685 755 815 745 715 885 Size (Square Feet) 1000 900 1200 810 1210 860 1135 960 800 960 650 970 1000 1000 1000...

Betty is a real estate dealer and has numerous properties for sale, many of which she...

Betty is a real estate dealer and has numerous properties for sale, many of which she owns. Her son is finishing his education and plans to go into the consulting business. Betty has committed at least $25,000 to help him out until the business becomes self-sufficient. Betty plans to dispose of one of the properties but wants to know if there is any way the gain on the property can be taxed at capital gains rates rather than as ordinary...

A real estate developer plans to build an apartment building near a major university aimed at generating rental income from graduate students.

Real Estate DevelopmentA real estate developer plans to build an apartment building near a major university aimed at generating rental income from graduate students. Four types of apartment are being considered in the planning process: studio apartments and 1, 2 or 3-bedroom units. It is assumed that studio apartments will be 500 sq. ft., 1-bedroom units will be 700 sq. ft., 2-bedroom units will be 800 sq. ft. and 3-bedroom units will be 1,000 sq. ft.The develop does not believe that the...

Question