1. Apply What You've Learned - Real Estate and Migh-Risk Investments Scenario: You are considering investing in real estate-both for the shart-term cash flows and the potential long-term capital gains-and are evaluating both a commercial lease property (such as a stip shopping center or an otfice buiding) and a residential rental property (such as several rental houses or a smali apartment complex). It is likely that you will invest in only one of these properties at this time. The general data regarding these ifvestments is as follows: The first potential investment consists of a seven-store shopping center, which has a current market price of $850,000,0 fis this amount, $212,500 represents the cost of the land, and the balance, $637,500, is attributable to buildings on the property. The second possible investment, which costs 5500,000 , consists of a small four-unit apartment compiex, $150,000 of the investment's total price is reflects the cost of land, and the remaining 5350,000 is assoclated 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 996 on your investments. One of the more important considerations associated with your ifvestment is a property's potential for generating a positive cash flow. One indicator of a property's Ikelihood of generating a positive cash flow is the property's rental yleld, The best formula for computing a property's rental yield is: Check ali that apply. Rental yield (%)=[(( Monthly rent 12)/2)/ Purchase price ]100 ist check all that apply. Rental yleld (%)=[(( Monthly rent 12)/2)/ Purchate price ]100 Rental yield (0)=[( Annual rent /2)/ Purchase price }100 Rental yield (%)=[( Monthly rent =12)/( Purchase price /2)]100 In the equations above, the reason that the values are divided by two is that it is assumed that spent on expenses other than debt repayment. The rental yield expected on the commercial preperty is - while the expected yiald on the residential property is Based an their respective rental yields, the is the better investment, Another indicator of their relative attractiveness as an investment is each property's price-to-rent rabo. The shopping center has a price-to-rent ratio of While the corresponding ratio for the apartment complex is - Based on this data, the the better investment. From an investor's perspective, a negative conclusion associated with an overly large ratio is that it suggests that property prices are very . Similarly, a discouraging explanation for an overly fatio is that rents and market prices are so ciose in value that a financially astute investor would rather a given property. The loan-to-value (LTV) for the shopping center is but is for the apartment complex. Assume that your expected annual operating costs-excluding your annual depreciation expense-for the commerclal property will be 35% of your annual rental income. For the residential property, the annual operating costs (excluding depreciation expense) will be 20% of your annual rental income. The interest rates of the mortgages for the commerclal and residential lease properties are expected to be 6% and 4%, respectively. Given your other assumptions, complete the following two tables and then use your computations to answer several guestions, Round ali amounts to the nearest whole doliar. (Hint: Don't round intermediate calculations. Also, don't forget that capital gains are taxed at is\% if properties are sold for more than their original purchase price.) The net discounted return expected from an investment in the shopping center-after deducting the cost of the investment-is Now perform a comparable analysis for the residential lease property: The net discounted return expected from an investment in the apartment complex-after deducting the cost of the investment-is Based on the results of your analysis, which of the following statements best reflects your decision regarding the commercial or residential lease opportunities? As the shopping center has a NPV that is greater than that expected from the apartment complex, it is more financially sound to inve-st in the commercial lease property. Because the apartment complex is expected to generate a negative NpV, you should not consider making this investment. Based on the numbers alone, you should prefer an investment in the shopping center since it has a net present value that is greater than that expected from the residential lease property (apartment complex). Given that the apartment complex has a NPV that is greater than that expected to be generated by the shopping center, you should prefer to invest in the residential lease property. As the apartment complex has a NPV that is greater than that expected from the shopping center, it is more financialiy sound to invest in the residential lease property. Because the shopping center is expected to generate a negative NPV, you should not consider making this Investment. Which of the following is not a tax-deductible expense for investment property? The repayment of principal on a mortgage loan Capital improvements Depreciation Fax-deductible expenses an investment's taxable income, and the return on your investment. 1. Apply What You've Learned - Real Estate and Migh-Risk Investments Scenario: You are considering investing in real estate-both for the shart-term cash flows and the potential long-term capital gains-and are evaluating both a commercial lease property (such as a stip shopping center or an otfice buiding) and a residential rental property (such as several rental houses or a smali apartment complex). It is likely that you will invest in only one of these properties at this time. The general data regarding these ifvestments is as follows: The first potential investment consists of a seven-store shopping center, which has a current market price of $850,000,0 fis this amount, $212,500 represents the cost of the land, and the balance, $637,500, is attributable to buildings on the property. The second possible investment, which costs 5500,000 , consists of a small four-unit apartment compiex, $150,000 of the investment's total price is reflects the cost of land, and the remaining 5350,000 is assoclated 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 996 on your investments. One of the more important considerations associated with your ifvestment is a property's potential for generating a positive cash flow. One indicator of a property's Ikelihood of generating a positive cash flow is the property's rental yleld, The best formula for computing a property's rental yield is: Check ali that apply. Rental yield (%)=[(( Monthly rent 12)/2)/ Purchase price ]100 ist check all that apply. Rental yleld (%)=[(( Monthly rent 12)/2)/ Purchate price ]100 Rental yield (0)=[( Annual rent /2)/ Purchase price }100 Rental yield (%)=[( Monthly rent =12)/( Purchase price /2)]100 In the equations above, the reason that the values are divided by two is that it is assumed that spent on expenses other than debt repayment. The rental yield expected on the commercial preperty is - while the expected yiald on the residential property is Based an their respective rental yields, the is the better investment, Another indicator of their relative attractiveness as an investment is each property's price-to-rent rabo. The shopping center has a price-to-rent ratio of While the corresponding ratio for the apartment complex is - Based on this data, the the better investment. From an investor's perspective, a negative conclusion associated with an overly large ratio is that it suggests that property prices are very . Similarly, a discouraging explanation for an overly fatio is that rents and market prices are so ciose in value that a financially astute investor would rather a given property. The loan-to-value (LTV) for the shopping center is but is for the apartment complex. Assume that your expected annual operating costs-excluding your annual depreciation expense-for the commerclal property will be 35% of your annual rental income. For the residential property, the annual operating costs (excluding depreciation expense) will be 20% of your annual rental income. The interest rates of the mortgages for the commerclal and residential lease properties are expected to be 6% and 4%, respectively. Given your other assumptions, complete the following two tables and then use your computations to answer several guestions, Round ali amounts to the nearest whole doliar. (Hint: Don't round intermediate calculations. Also, don't forget that capital gains are taxed at is\% if properties are sold for more than their original purchase price.) The net discounted return expected from an investment in the shopping center-after deducting the cost of the investment-is Now perform a comparable analysis for the residential lease property: The net discounted return expected from an investment in the apartment complex-after deducting the cost of the investment-is Based on the results of your analysis, which of the following statements best reflects your decision regarding the commercial or residential lease opportunities? As the shopping center has a NPV that is greater than that expected from the apartment complex, it is more financially sound to inve-st in the commercial lease property. Because the apartment complex is expected to generate a negative NpV, you should not consider making this investment. Based on the numbers alone, you should prefer an investment in the shopping center since it has a net present value that is greater than that expected from the residential lease property (apartment complex). Given that the apartment complex has a NPV that is greater than that expected to be generated by the shopping center, you should prefer to invest in the residential lease property. As the apartment complex has a NPV that is greater than that expected from the shopping center, it is more financialiy sound to invest in the residential lease property. Because the shopping center is expected to generate a negative NPV, you should not consider making this Investment. Which of the following is not a tax-deductible expense for investment property? The repayment of principal on a mortgage loan Capital improvements Depreciation Fax-deductible expenses an investment's taxable income, and the return on your investment