Question
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
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started