You are considering buying or renting a property. You can rent it for $4,000 per month. The owner is responsible for all maintenance, property insurance and taxes. You can also buy the property for $450,000 and finance it with an 80% mortgage at 4.50% over 30 years. Properties have historically appreciated at 3.1% per annum. Rents increase at 3.25 percent. Maintenance and insurance is $1,500 per year but increase at 2.8%. You are in a 26% tax bracket. You plan on holding the property for 4 years and if sold, it would qualify for capital gains exclusion. Selling costs are 8 percent and property taxes are 2% each year.
What is the property value in years 4 and 5?
What is the loan balance in years 4 and 5?
If you sell in Year 4, what is the after-tax cashflow and the IRR?
If you sell in Year 5, what is the after-tax cashflow and IRR?