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| June 10, 2016

Question
Part Two Real Estate Investment Analysis
You are considering buying an apartment complex with a firm purchase price of $240,000. You
can get a 20­year loan for 75% of the purchase price that has a 10% interest rate.
1 What would be the cash down payment?
2

You estimate the following financial data for the first year:
Gross annual rental (8 units at $500 per month), 6% vacancy rate
Property taxes: $6,600
Maintenance: $1,900
Utilities: $2,360
Insurance: $2,600
You plan to hold the property for three years and then sell it. Following the procedure in
Table 20A2 of the textbook, what would be the net operating income for each of the
first three years? Calculate NOI for year 1 using the provided data, and then assume it
will grow by 5 percent per year.

3

What would the depreciation be for each of the first three years? The building has a value
of $190,000 (the remaining $50,000 is land value, which doesnt depreciate). Assume
straight line depreciation with a 27.5 year write­off.

4

You estimate interest expenses for the first three years would be:
Year 1: $18,000
Year 2: $17,686
Year 3: $17,340
Based on the information you computed in parts B and C and the data given in part D,
what would be the taxable income? Use a procedure similar to Table 20A3 in the
textbook.

5

How much would taxes be for each of the three years? Use a procedure similar to the last
two columns of Table 20A4 in the textbook. Assume a tax rate of 35%.

6

Using net operating income from part B, taxes owed from part D, and annual mortgage
payments for each of the three years of $21,142, what would be the cash flow for each of
the three years? Use a procedure similar to that in Table 20A5 in the textbook.

7

Assume the apartment complex increases in value by 8% per year over the next three
years. Using Appendix A of the textbook, what would the initial value of $240,000 grow
to after three years.

8

What would the net proceeds from the sale of the apartment complex be in three years?
Assume 6% in commissions and fees.

9

Assume the apartment complex has a book value of $219,252. What would be the capital
gains from the sale of property? (Subtract $219,252 from the net proceeds computed in
part H.)

10 What would be the capital gains tax? (Multiply the capital gains from part I by 15%.)
11 What would be the funds generated from the sale of the apartment complex? (Subtract the
capital gains tax from part J from the net proceeds from part H)
12 What would be the net cash flow from the sale of the apartment complex? (Subtract the
remaining mortgage of $169,600 from the funds from the sale from part K.)
13 What is the present value of total cash flows using a discount rate of 9% from Appendix
C of the textbook? Refer to Table 20A6 in the textbook. The cash flow in Years 1 and 2
can be found in part F. The cash flow for Year 3 is the sum of Year 3 from part F plus the
net cash flow from the sale of the apartment complex in part L.
14 What is the net present value of the investment? Subtract the cash down payment from
part A from the present value of total cash flows from part M.
15. Based on the net present value of the investment, should the apartment complex be
purchased?

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