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Which scenario is more risky? Why will most real estate investors choose the scenario with a mortgage? Scenario with a Mortgage Year 0 1 2
Which scenario is more risky?
Why will most real estate investors choose the scenario with a mortgage?
| Scenario with a Mortgage | |||||||
| Year | 0 | 1 | 2 | 3 | 4 | 5 | |
| NOI | 200,000 | 240,000 | 245,000 | 250,000 | 260,000 | ||
| Debt Service | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | ||
| After Tax Cash Flows | 75,000 | 115,000 | 120,000 | 125,000 | 135,000 | ||
| 1,400,000 | =ATER | ||||||
| Total Cash Flows | -1,250,000 | 75,000 | 115,000 | 120,000 | 125,000 | 1,535,000 | |
| IRR = | 10.83 | ||||||
| Scenario without a Mortgage | |||||||
| Year | 0 | 1 | 2 | 3 | 4 | 5 | |
| NOI | 200,000 | 240,000 | 245,000 | 250,000 | 260,000 | ||
| DS | 0 | 0 | 0 | 0 | 0 | ||
| After Tax Cash Flows | 200,000 | 240,000 | 245,000 | 250,000 | 260,000 | ||
| 2,900,000 | =ATER | ||||||
| Total Cash Flows | -2,800,000 | 200,000 | 240,000 | 245,000 | 250,000 | 3,160,000 | |
| IRR = | 9.05% | ||||||
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Financial management theory and practice
Authors: Eugene F. Brigham and Michael C. Ehrhardt
13th edition
1439078106, 111197375X, 9781439078105, 9781111973759, 978-1439078099
