Example on purchasing property with cash versus financing

Assumptions:

Property Purchase Price: $500,000

Monthly Gross Revenue: $7,000

Monthly Operating Expense: $2,500

Investors Tax Rate: 30%

Investor U (unleveraged): Pays all cash

Investor L (leveraged): Pays 20% down and takes out a loan (mortgage) for the balance.

Loan terms 30 years, 8% interest rate.

What is the after tax return for each investor?

Investor U Unleveraged (Pays with all cash)

Cash investment at time of purchase =

Gross Revenue

-OPE

EBIT

-Interest

EBT

Taxes (30%)

NI

-Principal

NI after Prin Pmt

After tax return = Year end CF/Initial Investment

Investor L - Leveraged

Cash investment at time of purchase =

Gross Revenue

-OPE

EBIT

-Interest

EBT

Taxes (30%)

NI

-Principal

NI after Prin Pmt

After tax return = Year end CF/Initial Investment