Question: You have an opportunity to acquire a property from a bank. It's offered for $200,000. You would have to spend:
(1) $10,500 on various acquisition-related expenses,
(2) An average of $2,000 per month during the next 12 months for repair costs, etc.
You would be able to receive a loan: 90 percent loan-to-value ratio, 8% annual interest, for 12 months, payable monthly (interest-only loan).
Your market research indicates that after you repair the property, it may sell for about $225,000 at the end of 1 year. In addition, you will probably have to pay about $3,000 in fees & selling expenses.
a. If you wanted to earn a 20% return, compounded monthly, do you believe that $200,000 would be a good investment? (Show and explain all necessary calculations.)
b. If not, what counter-offer would you have to make to the bank in order to achieve the 20% return? (Show and explain all necessary calculations.)