Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

1.) Please assume that you need to invest $300,000 in single-family real estate as part of your diversified portfolio strategy. The rules for investment are

1.) Please assume that you need to invest $300,000 in single-family real estate as part of your diversified portfolio strategy. The rules for investment are outlined in the table below.

For question number 1, in the table below, please fill in the correct quantity where you find ???.

Then respond with your thoughts to the questions that follow. The exercise is for you to flesh out the pro forma results.

Assumptions: You have found an area where you can buy houses for $300,000, where the rents you receive amount to a 7% return after all maintenance, taxes, fees, and misc. expenses. Lenders will let you mortgage up to 80% of house value at 3%, Constraint: You only have $300,000 to invest, ignore closing fees, and must invest as per one of the four scenarios below.

Question: What are your Returns on Equity (ROE) per year and Income per year in each of the following investment scenarios? Make sure fill in the numbers for the "?'s". Also, ignore taxes and depreciation for simplicity.

Scenario 1 Scenario 2 Scenario 3 Scenario 4
Total Equity Investment $300,000
Cost per House $300,000
ROA: 7% ? ? ?
Cost of Debt 3%
# of Rental Houses Bought 1 2 4 5
Multiplied by
$300,000 per House = $300,000 $600,000 $1,200,000 $1,500,000
Amount of Mortgage on Each House 0 $150,000 $225,000 $240,000
Total Amount of Mortgage Debt 0 $300,000 $900,000 $1,200,000
Bal Sheet Accounting Equation
Total Assets $300,000 $600,000 $1,200,000 $1,500,000
equal (=)
Total Liabilities 0 ? ? ?
plus (+)
Total Equity $300,000 ? ? ?
Abbrev. Inc Statement
Operating Income (Assets x ROA) $21,000 ? ? ?
minus (-)
Cost of Debt ( x total mortgage amount) $0 ? ? ?
equals (=)
Net Income $21,000 ? ? ?
ROE: 7.00% ? ? ?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Video Basics

Authors: Herbert Zettl

6th Edition

0495569437, 9780495569435

More Books

Students also viewed these Accounting questions

Question

Create a decision tree for Problem 12.

Answered: 1 week ago