Question

An income property has 8 rental units. Each unit has a year 1 monthly rent of $850. The annual operating expenses for the property in year 1 are as follows:
Utilities: $3,200
Insurance: $4,500
Repairs and maintenance: $5,500
Trash removal: $2,500
Water: $2,200
Reserves: $5,000
In addition, there is a 6% management fee, and an estimated vacancy rate of 4%.
The asking price for this property is $825,000, and you can obtain a 75 LTV loan with a fixed rate of 5.25% and a 25 year term. The property will be depreciated over 30 years on a straight-line basis. The appropriate marginal tax rate is 32%.

a. Using a cap rate of 6%, calculate an estimated market price for this property.

b. Calculate the after-tax cash flow from this property in year 1.

c. Assume that rent grows at 5% in years 2 and 3. Assume that management and vacancy rates remain the same as a percentage of gross rent. Assume that all operating expense items grow at 4% in years 2 and 3. Assume that the property can be sold for $925,000 at the end of year 3. Calculate the after-tax cash flows for years 2 and 3, and the after-tax IRR for the proposed purchase.

Answer 1

a)

The estimated market price of the property is $842,333.33

b)

The after tax cash flow from the property in year 1 is $43,167.20

c)

The IRR of the property is 9.14%

The same with Excel Formulas shown: