An investor is considering buying a rental duplex with land valued at $30,000 and the building valued at $150,000. Straight-line depreciation over 27 1?2 years will be taken. The investor will be actively involved in the management of the property. He is in a 30 percent tax bracket.
Assume potential gross income of $28,500 in year one, vacancy of 10% and Operating expenses equal to 40% of Effective gross income. Gross potential income is expected to increase by 2% each year over the holding period.
A lender will make a 20-year loan equal to 75 percent of the total value of the property at 9 percent interest with monthly payments.
Assume that there is 3.5 percent inflation related to total property value each year the investor owns the property and that there is a 4% commission paid (selling expenses) in the year of sale.
Assume that the investor’s after tax required rate of return is 12% and will hold the property for three years.
Use the 25% tax rule where: for capital gain -- (tax rate >25% use marginal tax rate of 15%); for depreciation recapture -- (tax rate >25% use marginal tax rate of 25%).
1. the after tax cash flows from operation in year 2.
A. -$2,152
B. -$1,244
C. +$1,244
D. +$1,592
E. +$2,158
2. the after tax cash flow from sale of the asset in year three.
A. -$57,507
B. -$46,856
C. +$47,230
D. +$59,076
E. +$64,052
3. NPV
A. -$1,097
B. -$846
C. +$710
D. +$846
E. +$1,097
4. IRR
A. 17.20%
B. 11.35%
C. 9.34%
D. 12.72%
E.16.11%
5. DCR for year 1
A. 0.76
B. 0.87
C. 0.98
D. 1.06
E. 1.18