What would the price have to be at the end of year

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Reference no: EM133430082

Question: An investor is considering the acquisition of a "distressed property" which is on Northlake Bank's REO list. The property is available for $200,200 and the investor estimates that he can borrow $160,000 at 4.5 percent interest and that the property will require the following total expenditures during the next year:

Inspection $ 503
Title search 1,006
Renovation 13,000
Landscaping 806
Loan interest 7,203
Insurance 1,803
Property taxes 6,003
Selling expenses 8,000
Required:

a. The investor is wondering what such a property must sell for after one year in order to earn a 20 percent return (IRR) on equity.

b. The lender is now concerned that if the property does not sell, investor may have to carry the property for one additional year. He believes that he could rent it (starting in year 2) and realize a net cash flow before debt service of $1,260 per month. However, he would have to make an additional $7,260 in interest payments on his loan during that time, and then sell. What would the price have to be at the end of year 2 in order to earn a 20 percent IRR on equity?

Reference no: EM133430082

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