An income property is under evaluation for purchase with an interest only loan at 8% annual rate for 10 years with a balloon payment. Payments are made annually and happen at the end of each year. We plan to hold the property for 3 years and then sell it at the end of year 3. The NOI for year 1 is 68,000 with a growth rate of 4%. The end capitalization rate is 12%. We assume after year 3, the NOI still increases at a rate of 2%. At the end of year 3, the cost can not exceed 60% of the income and the investor would like to borrow as much as they can.

a. With the overall discount rate of 15%, what is the net present value for this property? 

b. With the asking price of 289,000, what is the IRR for this investment? 

Answer rating: 100% (QA)

a Calculation of Net Present Value NPV Subheading Calculation of Present Value of Cash Flows To calculate the net present value of the income property we need to calculate the present value of all fut... View the full answer