Problem
Five years later, you are offered your dream job in Turks and Caicos. You need to sell this house in order to purchase a new one where you are moving. Your roommate would like to remain in the home until they finish their PhD in 6 years. They are willing to sign a six year lease with the following terms: Rent will be $2,000/month for the first three years, and increase to $2,200/month for the remaining three years. The average investor's holding period on residential rental properties is six years. You have estimated gross sale proceeds will be $530,688.37 at the end of the investor's holding period. The appropriate discount rate is 4.2%.
A. What is the minimum price you should list the property for (i.e. the maximum an investor would be willing to pay)? *Remember, the value of an investment property comes from its cash flows. That is, you need to consider both the estimated gross proceeds at the end of the holding period AND the stream of cash flows the investor will receive from rent while they own the property. I recommend converting the monthly rents into annual cash flows for simplicity in solving this problem.
B. What will the investor's "going-in" IRR be if they pay exactly list price?
C. Rather than add your friend's rent to your monthly mortgage payments, you have been saving towards your moving expenses. If you close on the home after making your last payment in year 5, how much will your loan payoff amount be (in other words, what is the outstanding balance on your loan after 5 years)?
D. Assuming you sell the home for exactly list price, pay 6% in real estate broker commissions and $10,500 in seller closing costs, what will be your net proceeds from the sale?