A real estate investor is considering purchasing a small warehouse. Analysis has resulted in the following facts: • The asking price is $450,000. • There are 10,000 square feet of leasable area. . • . • The expected rent is $5 per square foot per year; rents will increase 5 percent per year. The 5 percent rent bumps will occur at the end of each year. Since the property is leased to an AAA-grade tenant for 25 more years, no vacancy factor is deducted. The tenant will pay all operating expenses except property taxes and insurance. These two expenses will equal 20 percent of the effective gross income (EG) each year. The investor can borrow 80 percent of the total cost for 10 years at an interest rate of 7 percent with monthly payments and total upfront financing costs equal to 3 percent of the amount borrowed. Payments will be based on a 20-year amortization schedule. 85 percent of the total acquisition cost is depreciable over the useful life of 39 years using the straight-line method (no personal property). Ignore the mid-month convention. • The investor expects to sell the property at the end of year 5. • The investor's ordinary income tax rate is 30 percent. • No capital expenditures have been made since acquisition. Required: Compute the after-tax cash flows from annual rental operations over the five-year housing period. Note: Round your final answer to nearest whole dollar amount. Year 1 Year 2 Year 3 Year 4 Year 5 After-tax cash flows
A real estate investor is considering purchasing a small warehouse. Analysis has resulted in the following facts: • The asking price is $450,000. • There are 10,000 square feet of leasable area. . • . • The expected rent is $5 per square foot per year; rents will increase 5 percent per year. The 5 percent rent bumps will occur at the end of each year. Since the property is leased to an AAA-grade tenant for 25 more years, no vacancy factor is deducted. The tenant will pay all operating expenses except property taxes and insurance. These two expenses will equal 20 percent of the effective gross income (EG) each year. The investor can borrow 80 percent of the total cost for 10 years at an interest rate of 7 percent with monthly payments and total upfront financing costs equal to 3 percent of the amount borrowed. Payments will be based on a 20-year amortization schedule. 85 percent of the total acquisition cost is depreciable over the useful life of 39 years using the straight-line method (no personal property). Ignore the mid-month convention. • The investor expects to sell the property at the end of year 5. • The investor's ordinary income tax rate is 30 percent. • No capital expenditures have been made since acquisition. Required: Compute the after-tax cash flows from annual rental operations over the five-year housing period. Note: Round your final answer to nearest whole dollar amount. Year 1 Year 2 Year 3 Year 4 Year 5 After-tax cash flows
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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am. 124.
Transcribed Image Text:A real estate investor is considering purchasing a small warehouse. Analysis has resulted in the following facts:
•
The asking price is $450,000.
•
There are 10,000 square feet of leasable area.
.
•
.
•
The expected rent is $5 per square foot per year; rents will increase 5 percent per year. The 5 percent rent bumps will occur at
the end of each year. Since the property is leased to an AAA-grade tenant for 25 more years, no vacancy factor is deducted.
The tenant will pay all operating expenses except property taxes and insurance. These two expenses will equal 20 percent of
the effective gross income (EG) each year.
The investor can borrow 80 percent of the total cost for 10 years at an interest rate of 7 percent with monthly payments and total
upfront financing costs equal to 3 percent of the amount borrowed. Payments will be based on a 20-year amortization schedule.
85 percent of the total acquisition cost is depreciable over the useful life of 39 years using the straight-line method (no personal
property). Ignore the mid-month convention.
•
The investor expects to sell the property at the end of year 5.
•
The investor's ordinary income tax rate is 30 percent.
•
No capital expenditures have been made since acquisition.
Required:
Compute the after-tax cash flows from annual rental operations over the five-year housing period.
Note: Round your final answer to nearest whole dollar amount.
Year 1
Year 2
Year 3
Year 4
Year 5
After-tax cash flows
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