Question: In the coming year, the Sandbergs expect a rental property investment costing $120,000 to have gross potential rental income of $20,000, vacancy and collection losses equaling 5% of gross income, and operating expenses of $10,000. The mortgage on the property is expected to require annual payments of $8,500. The interest portion of the mortgage payments and the depreciation are given below for each of the next 3 years. The Sandbergs are in the 25% marginal tax bracket.
Year Interest Depriciation
1 $8,300 $4,500
2 $8,200 $4,500
3 $8,100 $4,500
The net operating income is expected to increase by 6% each year beyond the first year.
a. Calculate the net operating income for each of the next 3 years.
b. Calculate the after-tax cash flow for each of the next 3 years.