2064 TRADITIONAL RATES OF RETURN By: Professor John S.H n University er North Te 1, GROSS RENT MULTELIER. Bet uoCler 897 QUITY YIELD R Gross Scledlod Inconne Cash Flow SYS Plus:Tax Savings CASE FLOW (Pre Tax) tO Groes Sched uled Income 2L Plus: Equity Buidup Plus: Appreciation Equals: Equity Yield nus: Vacancy/Credit Loss Rental rcome Plus: Other Income - Groes Operating Incorme-$25o Less Operating Costs - Net Operating Income Less: Debt Service RATE OF RETURN .. ToaJ Benefits Mins: Investmer Cash Flow TD of years owned CAPITALIZATION RATE Market Value TERNAL RATE OF RETURN . CASH-ON-CASH RETURS. TAX SAVINGS Net Opersting Income Mins: Intrrest MANAGER'S RATE OF RETURN Mius: Depreciation Equals Times: Investor's Tax Brackes Equals: Tax Savings ear-_1 Safe Rate % 4rd Year rd Year oh Year NET SPENDABLE RETURN. Cash Flow Plus: Tax Savings Equals Net Spendable C R-LOTUS 7.EQUITY BUILDUP, TAX SAVINGS, AND CASH Real Estate Research Cr- 3 WRETURN Cash Flow Plus: Tax Savings Plus: Equiry Buddup University of Florida 56 ksville Florida 32611 USA 18 Ist year *Toust year Calculations only. orly To,.5%)112 . saare 3Ew .. Total Benefits which Invesament 27A 49s o Trammel Crow Universay/15. Baen We have a property near UNT under contracloption to buy" for 60 days at $675,000 (contract price). We have estimated that repairs required by lender total S25,000 at time zero and will be included in the basis or $700,000. The bank will lend us 80%to buy the-repaired-property. and investment we will consider buying during the "contract/option" period as follows: The Boarding House is almost new! cost on the day of closing. The "effective purchase price" therefore is Details of the transaction Assume rent at $700 per month per units (10 units) or $7,000 per month total. The proposed loan is for 30 years at 4% interest with annual payments and a loan constant of.057830 Assume 10% vacancy for 3 years. It's a university town! Expenses shall include outside professional property management fees of 7% for total potential rent per year (assume fully leased). Other expenses, taxes, insurance, and 1. 2. 3, 4. maintenance will total $26,500 of gross income the first year 5. The investor's IRS tax bracket is 35% for 3 6. The land is 10% of acquisition ofeffective total priceofS675,000 at 27.5 year years / Ere-lede depreciation or 100% +27.5-3636%-year (TheS25Evea in Appreciation is 8% the fi going up (free parking for tenants) 7. rst year, UNT is growing and prices of apt rents and parking are e"safe rate" or reinvestment rate for the financial manager's rate of return is a 9, Assume an appreciation rate of rents at 10% per year for 3 years with 10-The resale price is based on a future CAP rate of 5% and net 11,Resale expenses in the year we sell are 8% in year 3. we sell in 3 years ( 12. Assume no CAP Gains Tax in year of same. We will work on that in class. money market fund of 3% the same period year 3 (We sell in year 3! No CAP Gains Tax assumed) and closing costs) Har expenses for operation income (NOD in Commissions I. Calculate 9 rates of return and at least diagram #10 IRR and e11 Show your work II. Is this a "good" deal? Should we buy it? III. If the vacancy rate is zero in the first year, does this change your opinion? How much does it improve the cash flow the first year if fully occupied? unting Rate of Return "Tolal Benefits S273 3155 Net $Return Divided by: years owned Divided by 159.06 *Total benefts which nel sales prodsmins debt ure Benefits: S-year Projection 0.10 Dor de Roos, 2003 2064 TRADITIONAL RATES OF RETURN By: Professor John S.H n University er North Te 1, GROSS RENT MULTELIER. Bet uoCler 897 QUITY YIELD R Gross Scledlod Inconne Cash Flow SYS Plus:Tax Savings CASE FLOW (Pre Tax) tO Groes Sched uled Income 2L Plus: Equity Buidup Plus: Appreciation Equals: Equity Yield nus: Vacancy/Credit Loss Rental rcome Plus: Other Income - Groes Operating Incorme-$25o Less Operating Costs - Net Operating Income Less: Debt Service RATE OF RETURN .. ToaJ Benefits Mins: Investmer Cash Flow TD of years owned CAPITALIZATION RATE Market Value TERNAL RATE OF RETURN . CASH-ON-CASH RETURS. TAX SAVINGS Net Opersting Income Mins: Intrrest MANAGER'S RATE OF RETURN Mius: Depreciation Equals Times: Investor's Tax Brackes Equals: Tax Savings ear-_1 Safe Rate % 4rd Year rd Year oh Year NET SPENDABLE RETURN. Cash Flow Plus: Tax Savings Equals Net Spendable C R-LOTUS 7.EQUITY BUILDUP, TAX SAVINGS, AND CASH Real Estate Research Cr- 3 WRETURN Cash Flow Plus: Tax Savings Plus: Equiry Buddup University of Florida 56 ksville Florida 32611 USA 18 Ist year *Toust year Calculations only. orly To,.5%)112 . saare 3Ew .. Total Benefits which Invesament 27A 49s o Trammel Crow Universay/15. Baen We have a property near UNT under contracloption to buy" for 60 days at $675,000 (contract price). We have estimated that repairs required by lender total S25,000 at time zero and will be included in the basis or $700,000. The bank will lend us 80%to buy the-repaired-property. and investment we will consider buying during the "contract/option" period as follows: The Boarding House is almost new! cost on the day of closing. The "effective purchase price" therefore is Details of the transaction Assume rent at $700 per month per units (10 units) or $7,000 per month total. The proposed loan is for 30 years at 4% interest with annual payments and a loan constant of.057830 Assume 10% vacancy for 3 years. It's a university town! Expenses shall include outside professional property management fees of 7% for total potential rent per year (assume fully leased). Other expenses, taxes, insurance, and 1. 2. 3, 4. maintenance will total $26,500 of gross income the first year 5. The investor's IRS tax bracket is 35% for 3 6. The land is 10% of acquisition ofeffective total priceofS675,000 at 27.5 year years / Ere-lede depreciation or 100% +27.5-3636%-year (TheS25Evea in Appreciation is 8% the fi going up (free parking for tenants) 7. rst year, UNT is growing and prices of apt rents and parking are e"safe rate" or reinvestment rate for the financial manager's rate of return is a 9, Assume an appreciation rate of rents at 10% per year for 3 years with 10-The resale price is based on a future CAP rate of 5% and net 11,Resale expenses in the year we sell are 8% in year 3. we sell in 3 years ( 12. Assume no CAP Gains Tax in year of same. We will work on that in class. money market fund of 3% the same period year 3 (We sell in year 3! No CAP Gains Tax assumed) and closing costs) Har expenses for operation income (NOD in Commissions I. Calculate 9 rates of return and at least diagram #10 IRR and e11 Show your work II. Is this a "good" deal? Should we buy it? III. If the vacancy rate is zero in the first year, does this change your opinion? How much does it improve the cash flow the first year if fully occupied? unting Rate of Return "Tolal Benefits S273 3155 Net $Return Divided by: years owned Divided by 159.06 *Total benefts which nel sales prodsmins debt ure Benefits: S-year Projection 0.10 Dor de Roos, 2003