Question

Property type	Price	Mortgage	Expected		Estimated
			Rental income	Depreciation expense	resale
			(per year)	(per year)	value
Strip shopping center	$800,000	$448,000	$136,016	$7,692	$912,000
Small apartment complex	$650,000	$292,500	$91,281	$8,273	$685,100

The first potential investment consists of a seven-store shopping center, which has a current market price of $800,000. Of this amount, $200,000 represents the cost of the land, and the balance, $600,000, is attributable to buildings on the property. The second possible investment, which costs $650,000, consists of a small four-unit apartment complex. $195,000 of the investment's total price is reflects the cost of land, and the remaining $455,000 is associated with structures on the land. For both properties, you believe you can increase the rents 2% per year for each of the next four years, and expect to sell either property at the end that time. You desire a return of 7% on your investments.

Now perform a comparable analysis for the residential lease property:

Small apartment complex	Year 1	Year 2	Year 3	Year 4
Annual rental income	$91,281	$93,107	$94,969	$96,868
Estimated resale value	0	0	0	685,100
Less: Annual operating expenses	18,256	18,621	18,994	19,374
Less: Annual depreciation expense	8,273	8,273	8,273	8,273
Less: Annual interest payments (4%)	11,700	11,115	10,530	9,945
Less: Taxes (25%)	13,263	13,775	14,293	14,819
Less: Capital gains tax (15%)	0	0	0
Net profit
Interest factor (7%)	0.9346	0.8734	0.8163	0.7629
PV of Cash flow
Total PV of Cash flows

The net discounted return expected from an investment in the apartment complex—after deducting the cost of the investment—is ($27,908, $10,843$, $660,843,$59,637).

Answer 1