An income property has 8 rental units. Each unit has a year 1 monthly rent of...

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.

Expert Solution

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:

jeff jeffy answered 2 years ago

Mel O’Conner operates rental properties in Michigan. Each property has a manager who collects rent, arranges...

Mel O’Conner operates rental properties in Michigan. Each property has a manager who collects rent, arranges for repairs, and runs advertisements in the local newspaper. The property managers transfer cash to O’Conner monthly and prepare their own bank reconciliations. The manager in Lansing has been stealing from the company. To cover the theft, he overstates the amount of the outstanding checks on the monthly bank reconciliation. As a result, each monthly bank reconciliation appears to balance. However, the balance sheet...

. A property is forecasted to generate annual rental income of $80,000 in year 1. Vacancy...

. A property is forecasted to generate annual rental income of $80,000 in year 1. Vacancy rate is expected to be 5%, there is also a 5% management fee. Other operating expenses will total $17,500 for year 1. Rent is expected to grow at 5% in years 2 and 3, and other operating expenses are expected to grow at 6% in years 2 and 3. You believe that you can sell the property at the end of year 3 for...

(dis.3) Mel O'Conner owns rental properties in Michigan. Each property has a manager who collects rent,...

(dis.3) Mel O'Conner owns rental properties in Michigan. Each property has a manager who collects rent, arranges for repairs, and runs advertisements in local newspapers. The property managers transfer cash to O'Conner monthly and prepare their own bank reconciliations. The manager in Lansing has been stealing from the company. To cover the theft, he understates the amount of the outstanding checks on the monthly bank reconciliation. As a result, each monthly bank reconciliation appears to balance. However, the balance sheet...

A property is forecasted to generate annual rental income of $110,000 in year Vacancy rate is...

A property is forecasted to generate annual rental income of $110,000 in year Vacancy rate is expected to be 5%, there is also a 5% management fee. Other operating expenses will total $19,000 for year 1. Rent is expected to grow at 8% in years 2 and 3, and other operating expenses are expected to grow at 5% in years 2 and 3. You believe that you can sell the property at the end of year 3 for $1,220,000. Using...

Suppose that annual income from a rental property is expected to start at $1330 per year...

Suppose that annual income from a rental property is expected to start at $1330 per year and decrease at a uniform amount of $70 each year after the first year for the 16 year expected life of the property. The investment cost is $6900 and i is %10 per year. What is the present equivalent of the rental income? Assume that the investment occurs at time zero (now) and that the annual income is first received at the end of...

Suppose that annual income from a rental property is expected to start at $1800 per year...

Suppose that annual income from a rental property is expected to start at $1800 per year and decrease at a uniform amount of $73 each year after the first year for the 13 year expected life of the property. The investment cost is $8800 and i is %11 per year. What is the present equivalent of the rental income? Assume that the investment occurs at time zero (now) and that the annual income is first received at the end of...

1. What is Schedule E depreciation (Rental property)? 2. What is Schedule E net income (Rental...

1. What is Schedule E depreciation (Rental property)? 2. What is Schedule E net income (Rental income & Sub-S income)? Paul Turner is single and has two children, Allen and Lee Ann, from his previous marriage. Allen lives with Paul and Paul provides more than half of his support. In the current year, Allen earned $300 of interest income and $5,000 working at a fast-food restaurant. Allen graduated from high-school in December 2017 and was not a registered student during...

1) Rental Income (T776) Dax Jones purchased a new property on May 1st 2019 with the...

1) Rental Income (T776) Dax Jones purchased a new property on May 1st 2019 with the intent to use it as a rental. The purchase price was $650,000. The land portion was valued at $50,000. He began advertising to find his first tenant right away. The following additional information was provided to you by Dax who has asked you to prepare his T776 form for 2019: The first tenant moved in on June 1st and is paying $800 per month...

1. Ron Remy enters into a three-year lease to rent his property. In the first year,...

1. Ron Remy enters into a three-year lease to rent his property. In the first year, in addition to $9,600 for the year's rent, he received $1,600 in advance as rent for the last two months of the lease and $800 as a security deposit which he plans to return to the tenant at the end of the lease. What amount must be reported as income by Ron? 2. B received a salary of $27,000 before he retired in October...

On June 1 of the current year, Chad Wilson established a business to manage rental property....

On June 1 of the current year, Chad Wilson established a business to manage rental property. He completed the following transactions during June: Opened a business bank account with a deposit of $48,000 from personal funds. Purchased office supplies on account, $2,080. Received cash from fees earned for managing rental property, $5,770. Paid rent on office and equipment for the month, $2,550. Paid creditors on account, $950. Billed customers for fees earned for managing rental property, $4,730. Paid automobile expenses...

Question