Real Estate Investment Returns. Marianne Mooney, benefits manager and her sister, Laureen, a middle-school teacher from Pompano Beach, Florida, are interested in the numbers of real estate investments. They have reviewed the figures in Table 16-2 and are impressed with investing together on a 50/50 basis to earn the potential 50.12 percent return after taxes. Assume that they bought the property with each contributed half of the down payment and they financed it with a 7 percent $175,000 30-year mortgage loan with annual interest costs of $11,900. Answer the following questions to help guide their investment decisions:

(a)Substitute the Maureens 25 percent marginal tax bracket (Florida has no state income tax) in Table 16-2, and calculate her taxable income and return after taxes.

(b)Substitute Laureens 15 percent tax rate (no state income tax) in Table 16-2, and calculate her taxable income and return after taxes.

(c)Why does real estate appear to be a favorable investment for Marianne and Laureen?

(d)What one factor might be changed in Table 16-2 to increase their returns?

Table 16-2

Interest Paid on Income Taxes Also Increases Investors Return

Gross rental income	$24,000
Less annual depreciation deduction	6,182
Subtotal	$17,818
Less interest expense for the year (5 percent, $175,000 mortgage)	7,900
Taxable income	$9,918
Cash flow after paying interest ($24,000 $7,900)	16,100
Less income tax liability (0.36 $9,918)	3,570
After-tax return ($16,100 $3,570)	$12,530
After-tax yield [$12,530 ($200,000 $175,000)]	50.12%