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%.
- Using a cap rate of 6%, calculate an estimated market price for this property.
- Calculate the after-tax cash flow from this property in year 1.
BONUS: 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.
Step by Step Solution
3.34 Rating (145 Votes )
There are 3 Steps involved in it
Step: 1
To calculate the estimated market price for the property using a cap rate of 6 use the formula Marke...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