We go to Zillow. Find a property on sale in Denver, Colorado. Then we find 3 comparable properties that are on rent and 3 comparable properties that just sold.

Part 2: Capital Budgeting Calculation, Assumptions, and Analysis

Investment Horizon: 5 years

Asset placed in Service: June, 2021

Tax-assumption: 2017 IRS code (Capital gains tax rate: 15%; investor's marginal tax rate on ordinary income: 24% - for the purpose of calculating after-tax rental income)

Capital Structure: 80% Debt, 20% Equity

Mortgage amount in $: Based on capital structure and comparable property value

Mortgage Interest Rate: 3.00% (per year) for a 30-year fixed-rate amortizing mortgage

Cost of capital: Make an appropriate assumption and justify your assumption (deliverable) in the write-up.

Income and Expenses:

Rent is closely tied to the property value.But we don't know the value of the selected property as yet.

In some markets you should be able to estimate the rental value of similar properties from Zillow by selecting for rent (purple dots) comparable properties in the neighborhood (within five blocks or 0.3 miles).If you wish, you may check the rental listings first and then select your target property to closely match the characteristics of the rental with those of the target property.List the full address of these properties as well as their characteristics (# of bedrooms, bathrooms, square feet, amenities, year built if available) as part of your deliverables.

Additionally, pick three comparable properties from the recently sold yellow dotted properties. List the full address of these properties as well as their characteristics (# of bedrooms, bathrooms, square feet, HOA fee if any, year built, and amenities) as part of your deliverables.

Because these properties may have been sold some time ago, they need appropriate market adjustment to obtain current value.

For market adjustment, we use an index: S&P 500 Corelogic Case-Shiller Index (20 city composite) without seasonal adjustment

https://fred.stlouisfed.org/series/SPCS20RNSA

So, if one of your comparable properties was sold in June, 2016, we observe (by hovering the mouse over the figure) that the Denver index value was 189.80 in June, 2016 and the current (Feb, 2021) seasonally unadjusted index value is 246.04.

If the comparable property was sold for $520,000 in June, 2016, we expect it to have sold for now (in Feb 2021) for $520,000x(246.04/189.80) $674,000.

Three index values from the time the comparable properties were sold and the three original sale price and index-adjusted value for the comparables are among the deliverables. If your comparable properties were sold between Feb 2021 and now, you do not need to do the index-adjustment and simply state the fact in your write-up.

Relevant Cash Flows from Income and Expenses (for five years):

1.For the first year the property has been put to service, do the following:

a.Use the rental estimate from Zillow if you can find the three comparable properties in a nearby location (five blocks or 0.3 miles),

or,

If you can't find comparable rental properties from Zillow, then assume a rental CASH FLOW per year of ~ 5.0% to 6.5% of the estimated average or weighted average comparable property value (index-adjusted adjusted value based on the three comparable properties sold in the past).

b.Rental flow increases at 2.5% per year after that.

2.Property tax/year: 75 basis points (0.6%) of property value or $1,500, whichever is more, in the first year and increasing at 2.5% per year.

3.Property insurance/year: 35 basis points (0.3%) of property value, or $1,000, whichever is more, in the first year and increasing at 2.5% per year.

4.Estimated maintenance cost/year: 50 basis points of property value, or, $ 2,000, whichever is more, in the first year and increasing at 2.5% per year.

5.Rental manager fee/year: 5% - 10% of rental income (lower end for condo, higher end for townhouses and single family homes)

6.Home Owners Association (HOA) Fee: Actual listed or $300 - $400/month for condo/townhouses and zero for single-family houses.

7.Other Cash Flow: 80 basis points of asset value, or $5,000, whichever is more, related to mortgage closing cost and preparing the property before renting it out (Misc. cost in the first year only)

8.Non-cash expense, i.e. depreciation: Use the 3.363% per year based on 27.5 year schedule provided (IRS 527 Table 2-2).