Assumptions
1. Potential Gross Income – Year 1 ? 96,000; Year 2 – increases 5%
2. Vacancy and Collection loss 10% throughout holding period
3. Expenses are 35% of Effective Gross Income
4. Purchase Price – Year 0 is $575,000 (Land Value is $100,000)
5. Loan Terms?
i. Loan to Value – 75%
ii. Interest Rate ? 6%
iii. Amortization ? 20 years
iv. Constant payment mortgage
6. This is a Multi family Property
7. The property is sold at the end of Year 2
i. Sales Price ? 9.5% Capitalization Rate of 2nd Year NOI
ii. Sales Commission ? 6%
8. Use the following tax rates:
Capital gains- 15%
Tax on accumulated depreciation- 25%
Personal Tax Rate- 28%
Questions:
1. Solve for the After Tax Cash Flows for Years 1 and 2
2. Solve for the After Tax IRR for the project
3. Solve for the IRR on a Before Tax Basis
4. Solve for the IRR on an unleveraged (cash basis)
Extra Credit – Based on the above numbers, is the subject property an example of positive, negative, or neutral leverage? What is the indicated cap rate based on your purchase price?