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%	?	?	?

2) What observations can you make about ROA, ROE, and the effects of leverage from this exercise? Which Scenario would you choose?

3) If the strategy employed in Scenario #4 had been executed in 2007, please talk about the likely outcomes versus the strategies of Scenarios #1 and #2.