Real Estate Investment

Note: Please include all calculations when the final project is submitted;Points are determined by accuracy of different parts of each question and not just on the final answer so if you get the answer wrong but had part of the calculation correct, I will give partial credit ... if you don't give me the 'calculations' I can't give you partial credit for incorrect responses.

Operating Revenues

Year 1

Year 2

Year 3

Year 4

Year 5

Gross Scheduled Income (GSI)

Vacancy Loss (unit only)

Net Rental Income

Other Income (garage potential - garage vacancy)

Gross Income (GI)

Operating Expenses

Repairs and Maintenance

12,240

Property Management Fees

3,600

Taxes

5,040

Insurance

1,800

Salaries and Wages

4,320

Utilities

6,480

Trash Removal

720

Professional Fees

360

Advertising

720

Other

1,080

Total Op Expenses

36,360

Net Operating Income (NOI)

Interest on Loan

Depreciation Expense

Net Income Before Taxes

Income Tax Rate (35%)

Net Income After Taxes

Cash Flow From Operations

Net Income after Taxes

Depreciation Expense

Total Cash Flow from Operations

Interest on Loan

Total Cash Available for Loan Servicing

Debt Service

Remaining After Tax Cash Flow from Operations

Plus Principal Reduction

Total Return

8,179

10,257

12,441

15,034

16,992

You are considering a purchase of a 4-plex, which is located in a desirable neighborhood.The cost of the property is $500,000.Effective rents are expected to average $1500 per month.Every resident receives one free parking space but has to pay an additional $50 per month for a one car garage located adjacent to the 4-plex (Note: There are only four garages on the property).Annual vacancy expenses for the units are expected to average 5% (assume the garage rentals will coincide with the unit rentals so will also incur a 5% vacancy loss per year).The average unit is 1500 sq. ft.

Financing information:

Amount financed: $350,000 (70% of purchase price)

Amortization period: 30 years, compounded monthly

Interest rate: 7.5%

1. Annual payment
2. Debt Service Coverage Ratio (DSCR) year one only --- leave one decimal place in answer (2 pts.)
3. create 5-year Pro Forma analysis using the excel worksheet in the assignment and the following information (4.5 pts.):

Rental increase projections: 4% per year for years 2 and 3 and 4.5 % for years 4 and 5.No increase in garage fees.

Operating expense increase projections: 2.5% per year for years 2 and 3 and 2% for years 4 and 5.

Assume a 35% tax rate for the investor.

Depreciation is calculated on the 'building' only using the straight-line method (27.5 years for residential properties and 39 years for commercial properties).For the purpose of this project, the breakdown of the building and land is as follows:

Land = $100,000

Building = $400,000 --- to calculate the depreciation, take this figure and divide by 27.5 to arrive at the annual deduction (note: there is actually a convention known as 'mid-year' that should be used but the number will be very close to this one and it can get a little confusing --- that's what accountants are for:-).

You will need to know the total annual payment for the loan and also be able to break the payment into its principal and interest components each year

The interest amount only is entered on the 'Interest on Loan' line item and the principal amount only on the 'Plus Principal Reduction' line item; In order to find each amount you will need a amortization to calculate the interest and principal for each of the 5 years as the amount of interest will go down slightly and the amount of principal payment up slightly each year throughout the term of the loan.DON'T put the same amounts on each of the five years as this will be incorrect.

The 'Debt Service' line item is the total annual payment including both interest and principal so basically, the total of the line items noted in #1 above.

Note: The proforma (and only the proforma) can be submitted for my review by the deadline noted in the due dates/deadlines chart under the 'Contents' organizer.It is important that the proforma is accurate in order to correctly calculate the other formulas needed for successful completion of the final project so please take advantage of this offer.It may take you several attempts to get the proforma correct so please leave ample time ... the deadline noted in the chart is the 'last day' so no reviews will occur after that date.

1. Using a cap rate of 8.0%, calculate the value at the end of years 1, 2, 3, 4, & 5

1. Calculate the following for each of the five years :

Net Income Return on Investment (NI - ROI)

Cash ROI

Total ROI

NOTE: ROI is actually about return on investment and refers to just the return on the 'original' investment adjusted for capital improvements planned at purchase, if there were any (which there aren't on the final project).If I asked you to calculate the ROE (Return on Equity), then you would adjust the equity in the denominator by the amount of other equity items found on a balance sheet but as it stands, only ROI calculations are required for the final project so you DON'T adjust for equity changes that occur in subsequent years.

1. Assuming the property were sold at the end of year 3 using a 9% cap rate, calculate the following:

Sale price (1 pts.)

Annualized IRR ... must leave one decimal place for percentages

1. Assuming the property were sold at the end of year 3 using an 7% cap rate, calculate the following:

Sale price (1 pts.)

Annualized IRR ... must leave one decimal place for percentages