Question
An income property has 8 rental units. Each unit has a year 1 monthly rent of $850. The annual operating expenses for the property in
An income property has 8 rental units. Each unit has a year 1 monthly rent of $850. The annual operating expenses for the property in year 1 are as follows:
Utilities:$3,200
Insurance:$4,500
Repairs and maintenance:$5,500
Trash removal:$2,500
Water:$2,200
Reserves:$5,000
In addition, there is a 6% management fee, and an estimated vacancy rate of 4%.
The asking price for this property is $825,000, and you can obtain a 75 LTV loan with a fixed rate of 5.25% and a 25 year term. The property will be depreciated over 30 years on a straight-line basis. The appropriate marginal tax rate is 32%.
a)Using a cap rate of 6%, calculate an estimated market price for this property.
b)Calculate the after-tax cash flow from this property in year 1.
c) Assume that rent grows at 5% in years 2 and 3. Assume that management and vacancy rates remain the same as a percentage of gross rent. Assume that all operating expense items grow at 4% in years 2 and 3. Assume that the property can be sold for $925,000 at the end of year 3. Calculate the after-tax cash flows for years 2 and 3, and the after-tax IRR for the proposed purchase.
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