Consider a new residential income producing property for sale to a potential investor. The sale price for
Question:
Consider a new residential income producing property for sale to a potential investor. The sale
price for the property is Sh. 1,250,000 and will be depreciated over 30 years on a straight-line
basis. Rent is estimated at Sh. 200,000 in the first year and is expected to grow at 3% p.a.
thereafter. Vacancies and collection losses are expected to be 10% of rent. Operating expenses
will be 31.5% of rent. A 70% mortgage loan can be obtained at 11% p.a. payable monthly for
30 years. The property is expected to appreciate at 3% per year and is expected to be owned
for five years and then sold. Capital gains tax rate of 15% is the only applicable tax.
Required
Calculate the expected IRR on equity invested. Is this investment viable if required rate of
return is 12%?