Attempts Avenge 12 1. Apply What You've learned Real Estate and High Risk Investments Scenario: You are considering investing in real estate-both for the short term cash flows and the potential long-term capital gains and we evaluating both a commercial lease property (uch as a strip shopping center or an office building) and a residential rental property (such as several rental houses or a small apartment complex). It is likely that you will event in only one of the properties at the time The general data regarding these investments is as follows: Estimated reale Property type Price Strip shopping center $900.000 Small apartment complex $600,000 Mortgage $504,000 $270,000 Expected Rental income Depreciation expense (per yar) (per year) $95,872 $8,654 $76,677 57,636 value $972,000 5621.600 The first potential investment consists of a seven-store shopping center, which has a current market price of 1000,000 of this mont, 225.000 represents the cost of the land, and the balance, $675,000, is attributable to buildings on the property. The second pouble vestment, which costs 3600,000, consists of a small four unit patient complex $100,000 of the investment's total price is reflect the cost of and, and the remaining 5420,000 is associated with structures on the land. For both properties, you believe you can increase the rent 25 per year for each of the next to years, and expect to selether priority at the end that time. You desire a return of on your investments One of the more important considerations associated with your investment is a property potential for energie pootvecash font ledicator of a property's likelihood of generating a positive cash flow is the properts retalye. The best formula for computing property's rental Vield One of the more important considerations associated with your investment is a property's potential for generating a positive cash flow. One indicator of a property's likelihood of generating a positive cash flow is the property's rental yield. The best formula for computing a property's rental vield ist Check all that apply Rental yield (%) - Annual rent/ nt / (Purchase price/33] x 100 Rental yield (%) - 1 Monthly rent * 12)/2)/Purchase price) * 100 Rental yield (96) - [Annual rent / 2)/Purchase price] * 100 hall of the rental income In the equations above, the reason that the values are divided by two is that it is awumed that spent on expenses other than debt repayment The rental yield expected on the commercial property is Based on their respective rental Vields, the while the expected Vield on the residential property is is the better investment. Another indicator of their relative attractiveness as an investment is each property's pnce to rent ratio. The shopping center has a price to rent ratio of while the corresponding ratio for the apartment complex is Based on this data, the the better investment. From an investor's perspective, a negative conclusion associated with an overly large ratio that it suggests that property pnces are very similarly, a discouraging explanation for an overly ratio is that rents and market prices are so close in value that financially astute investor would rather given property The loan-to-value (LTV) for the shopping center is .butis for the apartment complex. Assume that your expected annual operating costs-excluding your annual deprecation expense--for the commeroal property will be 35% of your annual rental income. For the residential property, the annual operating costs (excluding depresion expense) will be 20% of your annual renta income. The interest rates of the mortgages for the commercial and residential lease properties are expected to be 6% and 4%, respectively. Given your other assumptions, complete the following two tables and then use your computations to answer several questions. Mound all amounts to the nearest whole dollar. (Hint: Don't round intermediate calculations. Also, don't forget that capital gains are taxed at 15% properties are sold for more than their original purchase price.) Year 4 Year 1 Year 3 Year 2 S 0 0 0 10 27,216 25,704 30,240 28,728 Strip shopping center Annual rental income Estimated resale value Less Annual operating expenses Less: Annual depreciation expense Less Annual interest payments (6%) Less: Taxes (28%) Less: Capital gains tax (15%) Net profit Interest factor (7%) PV of Cash flow Total PV of Cash flows 0 0 0 s 0.7629 0.8163 0.9346 0.8734 5 S The net discounted return expected from an investment in the shopping center-after deducting the cost of the investments Now perform a comparable analysis for the residential lease property Year 2 Year 3 $79.983 578,415 Year 1 $76,877 0 Year 4 581 582 621,600 16.315 7.636 Small apartment complex Annual rental income Estimated resale value Less Annual operating expenses Annual depreciation expense 0 15,375 7.636 15,683 7,636 15,997 7,635 Ch 16: Apply what youve learned Real Estate and High-Risk Investments The net dinonanted return expected from an investment in the shopping croter-after deducting the cont of the investment- Year 2 $78,415 Year 31,502 Years 579,00 . 15.99 7,436 691,600 16,116 Now perform a comparable analysis for the resential tone property Small apartment complex Yeart Annual rental income $76,877 Estimated resale value Less Annual operating expenses 15.335 Lest: Arvul depreciation expense 7.636 Les Annual interest payments (6) 10,000 Less Tas (2) 12.050 Les Capital gains tax (155) Net profit Interest factor (79) PV of Cash flow Total PV of cash flows 7,636 10,260 12.554 0 2.720 334056 160 13.566 0.8734 0.8163 0.7629 The netoscounted returnereded from an investment in the soutent complete detecting the cost of the ever- Based on the results of your ans, which of the following statements best reflects your decision regarding the commercial or residential tiene opportune As the shopping center as that is greater than that expected from the parent completismo fancy sound to the commercial lease property. Because the apartment complex is expected to generate a neve. You should not consider making this investment Ch 16: Apply what you've learned - Real Estate and High-Risk Investments The net discounted return expected from an investment in the apartment complex-after deducting the cost of the investments Based on the results of your analysis, which of the following statements best reflects your decision regarding the commercial or residential lease opportunities? As the shopping center has a NPV that is greater than that expected from the apartment complex, it is more financially sound to invest in the commercial lease property. Because the apartment complex is expected to generate a negative NPW, you should not consider making this investment. Based on the numbers alone, you should prefer an investment in the shopping center since it has a net present value that is greater than that expected from the residentialitate property (partment complex). As the apartment complex has a NPV that is greater than that expected from the shopping center, it is more financially sound to invest in the residential lease property. Because the shopping center is expected to generate a negative NP, you should not consider making this investment Given that the apartment complex has a NPV that is greater than that expected to be generated by the shopping center, you should preter to invest in the residential leate property Which of the following is not a tax deductible expense for investment property? Maintenance and repairs Interest on a mortgage loan Lost rent resulting from vacancies the return on your investment an investment's taxable income, and Tax-deductible expenses Grade it Now Save & Continue Attempts Avenge 12 1. Apply What You've learned Real Estate and High Risk Investments Scenario: You are considering investing in real estate-both for the short term cash flows and the potential long-term capital gains and we evaluating both a commercial lease property (uch as a strip shopping center or an office building) and a residential rental property (such as several rental houses or a small apartment complex). It is likely that you will event in only one of the properties at the time The general data regarding these investments is as follows: Estimated reale Property type Price Strip shopping center $900.000 Small apartment complex $600,000 Mortgage $504,000 $270,000 Expected Rental income Depreciation expense (per yar) (per year) $95,872 $8,654 $76,677 57,636 value $972,000 5621.600 The first potential investment consists of a seven-store shopping center, which has a current market price of 1000,000 of this mont, 225.000 represents the cost of the land, and the balance, $675,000, is attributable to buildings on the property. The second pouble vestment, which costs 3600,000, consists of a small four unit patient complex $100,000 of the investment's total price is reflect the cost of and, and the remaining 5420,000 is associated with structures on the land. For both properties, you believe you can increase the rent 25 per year for each of the next to years, and expect to selether priority at the end that time. You desire a return of on your investments One of the more important considerations associated with your investment is a property potential for energie pootvecash font ledicator of a property's likelihood of generating a positive cash flow is the properts retalye. The best formula for computing property's rental Vield One of the more important considerations associated with your investment is a property's potential for generating a positive cash flow. One indicator of a property's likelihood of generating a positive cash flow is the property's rental yield. The best formula for computing a property's rental vield ist Check all that apply Rental yield (%) - Annual rent/ nt / (Purchase price/33] x 100 Rental yield (%) - 1 Monthly rent * 12)/2)/Purchase price) * 100 Rental yield (96) - [Annual rent / 2)/Purchase price] * 100 hall of the rental income In the equations above, the reason that the values are divided by two is that it is awumed that spent on expenses other than debt repayment The rental yield expected on the commercial property is Based on their respective rental Vields, the while the expected Vield on the residential property is is the better investment. Another indicator of their relative attractiveness as an investment is each property's pnce to rent ratio. The shopping center has a price to rent ratio of while the corresponding ratio for the apartment complex is Based on this data, the the better investment. From an investor's perspective, a negative conclusion associated with an overly large ratio that it suggests that property pnces are very similarly, a discouraging explanation for an overly ratio is that rents and market prices are so close in value that financially astute investor would rather given property The loan-to-value (LTV) for the shopping center is .butis for the apartment complex. Assume that your expected annual operating costs-excluding your annual deprecation expense--for the commeroal property will be 35% of your annual rental income. For the residential property, the annual operating costs (excluding depresion expense) will be 20% of your annual renta income. The interest rates of the mortgages for the commercial and residential lease properties are expected to be 6% and 4%, respectively. Given your other assumptions, complete the following two tables and then use your computations to answer several questions. Mound all amounts to the nearest whole dollar. (Hint: Don't round intermediate calculations. Also, don't forget that capital gains are taxed at 15% properties are sold for more than their original purchase price.) Year 4 Year 1 Year 3 Year 2 S 0 0 0 10 27,216 25,704 30,240 28,728 Strip shopping center Annual rental income Estimated resale value Less Annual operating expenses Less: Annual depreciation expense Less Annual interest payments (6%) Less: Taxes (28%) Less: Capital gains tax (15%) Net profit Interest factor (7%) PV of Cash flow Total PV of Cash flows 0 0 0 s 0.7629 0.8163 0.9346 0.8734 5 S The net discounted return expected from an investment in the shopping center-after deducting the cost of the investments Now perform a comparable analysis for the residential lease property Year 2 Year 3 $79.983 578,415 Year 1 $76,877 0 Year 4 581 582 621,600 16.315 7.636 Small apartment complex Annual rental income Estimated resale value Less Annual operating expenses Annual depreciation expense 0 15,375 7.636 15,683 7,636 15,997 7,635 Ch 16: Apply what youve learned Real Estate and High-Risk Investments The net dinonanted return expected from an investment in the shopping croter-after deducting the cont of the investment- Year 2 $78,415 Year 31,502 Years 579,00 . 15.99 7,436 691,600 16,116 Now perform a comparable analysis for the resential tone property Small apartment complex Yeart Annual rental income $76,877 Estimated resale value Less Annual operating expenses 15.335 Lest: Arvul depreciation expense 7.636 Les Annual interest payments (6) 10,000 Less Tas (2) 12.050 Les Capital gains tax (155) Net profit Interest factor (79) PV of Cash flow Total PV of cash flows 7,636 10,260 12.554 0 2.720 334056 160 13.566 0.8734 0.8163 0.7629 The netoscounted returnereded from an investment in the soutent complete detecting the cost of the ever- Based on the results of your ans, which of the following statements best reflects your decision regarding the commercial or residential tiene opportune As the shopping center as that is greater than that expected from the parent completismo fancy sound to the commercial lease property. Because the apartment complex is expected to generate a neve. You should not consider making this investment Ch 16: Apply what you've learned - Real Estate and High-Risk Investments The net discounted return expected from an investment in the apartment complex-after deducting the cost of the investments Based on the results of your analysis, which of the following statements best reflects your decision regarding the commercial or residential lease opportunities? As the shopping center has a NPV that is greater than that expected from the apartment complex, it is more financially sound to invest in the commercial lease property. Because the apartment complex is expected to generate a negative NPW, you should not consider making this investment. Based on the numbers alone, you should prefer an investment in the shopping center since it has a net present value that is greater than that expected from the residentialitate property (partment complex). As the apartment complex has a NPV that is greater than that expected from the shopping center, it is more financially sound to invest in the residential lease property. Because the shopping center is expected to generate a negative NP, you should not consider making this investment Given that the apartment complex has a NPV that is greater than that expected to be generated by the shopping center, you should preter to invest in the residential leate property Which of the following is not a tax deductible expense for investment property? Maintenance and repairs Interest on a mortgage loan Lost rent resulting from vacancies the return on your investment an investment's taxable income, and Tax-deductible expenses Grade it Now Save & Continue