bjective: uppose Sally and Dave are considering buying an investment apartment, renting it. or five years and then selling it. They are planning to buy the property with a lortgage loan with 5 -year Fixed Interest rates. hey ask your advice to evaluate if this is a profitable investment. ssumptions/lnput Data: - The condo costs $800,000 and depreciates over 30 years. - Investors are planning to buy it with a mortgage loan with a 10% down payment, monthly payment frequency, and 25 years horizon. 5-year Fixed Interest rates are currently 2.5% APR. [assume it is repaid at the beginning of each month]. - The current rent for the condo is $2,500 per month [received at the beginning of the month] - There are additional miscellaneous expenses: - condo fees of $200 per month [paid at the beginning of each month] - insurance on mortgage + maintenance $50 per month [paid at the beginning of each month] - tenant management fee $2000 [paid at the beginning of each year] - property taxes of $1,500 annually [paid at the end of each year] - All expenses and revenues will grow at the long-term inflation rate (i.e. 2\%), except the property tax, which will grow with the property value (i.e., 5\%) - Currently, Sally and Dave have an effective tax rate of 30%. But their expenses related to their rental income are tax-deductible. [i.e. these expenses reduce their taxable income (or EBIT), therefore they pay less taxes. In general, the non-taxable expenses need to be subtracted from the after-tax income] - Investors predict that during the next 5 years, the price of this condo will appreciate by 5% per year. - The transaction costs for buying and selling the condo are - 3\% of condo price at the time of purchase, for city tax/legal fees/ ... - 5\% of condo price at the time of selling, for the realtors/legal fees/... In MS-Excel, create a model, where you input the above data points and the model gives the following information as an output: - What is the Cash Flow for each month? Assume taxes are paid in December of each year. - What is the IRR of this investment? - What is the IRR if inflation rises to 3% ? Or drops to 1% ? bjective: uppose Sally and Dave are considering buying an investment apartment, renting it. or five years and then selling it. They are planning to buy the property with a lortgage loan with 5 -year Fixed Interest rates. hey ask your advice to evaluate if this is a profitable investment. ssumptions/lnput Data: - The condo costs $800,000 and depreciates over 30 years. - Investors are planning to buy it with a mortgage loan with a 10% down payment, monthly payment frequency, and 25 years horizon. 5-year Fixed Interest rates are currently 2.5% APR. [assume it is repaid at the beginning of each month]. - The current rent for the condo is $2,500 per month [received at the beginning of the month] - There are additional miscellaneous expenses: - condo fees of $200 per month [paid at the beginning of each month] - insurance on mortgage + maintenance $50 per month [paid at the beginning of each month] - tenant management fee $2000 [paid at the beginning of each year] - property taxes of $1,500 annually [paid at the end of each year] - All expenses and revenues will grow at the long-term inflation rate (i.e. 2\%), except the property tax, which will grow with the property value (i.e., 5\%) - Currently, Sally and Dave have an effective tax rate of 30%. But their expenses related to their rental income are tax-deductible. [i.e. these expenses reduce their taxable income (or EBIT), therefore they pay less taxes. In general, the non-taxable expenses need to be subtracted from the after-tax income] - Investors predict that during the next 5 years, the price of this condo will appreciate by 5% per year. - The transaction costs for buying and selling the condo are - 3\% of condo price at the time of purchase, for city tax/legal fees/ ... - 5\% of condo price at the time of selling, for the realtors/legal fees/... In MS-Excel, create a model, where you input the above data points and the model gives the following information as an output: - What is the Cash Flow for each month? Assume taxes are paid in December of each year. - What is the IRR of this investment? - What is the IRR if inflation rises to 3% ? Or drops to 1%
