Question
An investor has $250,000 to invest in a 640 acre tract of land that is expected to generate a real income (in current purchasing power
An investor has $250,000 to invest in a 640 acre tract of land that is expected to generate a real income (in current purchasing power units) of $120 per acre over time. A bank will amortize a real estate loan with 30 years of constant nominal payments but requires that the loan "cash flow" in the first year. Additional land can be rented that is expected to provide $40 per acre after expenses. Assume that rR = 0.05, the banks real interest rate is iR = 0.04, expected inflation is f = 0.03, and the Fisher effect holds. How much additional land will the investor need to rent after the down payment if the resulting loan is to "cash flow"?
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