Reference no: EM133175286

Question - You are considering the purchase of an apartment complex. The following assumptions are made:

The purchase price is $1,000,000.

Real Estate Finance 22

Potential gross income (PGI) for the first year of operations is projected to be $171,000. • PGI is expected to increase at 4 percent per year.

No vacancies are expected.

Operating expenses are estimated at 35 percent of effective gross income. Ignore capital expenditures.

The market value of the investment is expected to increase 4 percent per year.

Selling expenses will be 4 percent.

The holding period is 4 years.

70 percent of the acquisition price can be borrowed with a 30-year, monthly payment mortgage.

The annual interest rate on the mortgage will be 8.0 percent.

Required -

a) Calculate net operating income (NOI) for each of the four years.

b) Calculate the net sale proceeds from the sale of the property.

c) Calculate the monthly mortgage payment. What is the total per year?

d) Calculate the loan balance at the end of years 1, 2, 3, and 4.

e) Calculate the amount of principal reduction achieved during each of the four years. f) Calculate the total interest paid during each of the four years.

g) Calculate the before-tax cash flow (BTCF) for each of the four years.

h) Calculate the before-tax equity reversion (BTER) from the sale of the property.

i) Calculate the annualized rate of return on the investment.