Answer all the following questions: 1. What are the primary benefits from investing in real estate...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Answer all the following questions: 1. What are the primary benefits from investing in real estate income property? 2. What factors affect a property's projected NOI? 3. What factors would result in a property increasing in value over a holding period? 4. How do you think expense stops and CPI adjustments in leases affect the riskiness of the lease from the lessor's point of view? 5. Why should investors be concerned about market rents if they are purchasing a property subject to leases? 6. What is meant by equity? 7. What are the similarities and differences between an overall rate and an equity dividend rate? 8. What is the significance of a debt coverage ratio? 9. What is meant by a tax shelter? 10. How is the gain from the sale of real estate taxed? 11. What is meant by an effective tax rate? What does it matter? 12. Do you think taxes affect the value of real estate versus other investments? 13. What is the significance of the passive activity loss limitation (PAL) rules for real estate investors? 1. You are an employee of University Investment Consultants, Ltd. and have been given the following assignment. You are to present an investment analysis of a new small residential income producing property for sale to a potential investor. The asking price for the property is $1,250,000; rents are estimated at $200,000 during the first year and are expected to grow at 3 percent per year thereafter. Vacancies and collection losses are expected to be 10 percent of rents. Operating expenses will be 35 percent of effective gross income. A 70 percent loan can be obtained at 11 percent interest for 30 years. The property is expected to appreciate in value at 3 percent per year and is expected to be owned for five years and then sold. a. What is the investor's expected before tax internal rate of return on equity invested? (BTIRR)? b. What is the first year debt coverage ratio? c. What is the terminal capitalization rate? d. What is the NPV using a 14 percent discount rate? What does this mean? e. What is the profitability index using a 4 percent discount rate? What does this mean? 2. (Extension of problem 1) You are still an employee of University Consultants, Ltd. The investor tells you that she would also like to know how tax considerations affect your investment analysis. You determined that the building represents 90 percent of value and would be depreciated over 39 years (use 1/39 per year). The potential investor indicates that she is in the 36 percent tax bracket and has enough passive income from other activities so that any passive loans from this activity would not be subject to any passive activity loss limitations. Capital gains from price appreciation will be taxed at 20 percent and depreciation recapture will be taxed at 25 percent. a. What is the investor's expected after tax internal rate of return on equity invested (ATIRR)? How does this compare with the before tax IRR (BTIRR) calculated earlier? b. What is the effective tax rate and before-tax equivalent yield? c. How would you evaluate the tax benefit of th investment? d. Recalculate the ATIRR in part (a) under the assumption that the investor cannot deduct any of the passive losses (they all become suspended) until the property is sold after five years. Answer all the following questions: 1. What are the primary benefits from investing in real estate income property? 2. What factors affect a property's projected NOI? 3. What factors would result in a property increasing in value over a holding period? 4. How do you think expense stops and CPI adjustments in leases affect the riskiness of the lease from the lessor's point of view? 5. Why should investors be concerned about market rents if they are purchasing a property subject to leases? 6. What is meant by equity? 7. What are the similarities and differences between an overall rate and an equity dividend rate? 8. What is the significance of a debt coverage ratio? 9. What is meant by a tax shelter? 10. How is the gain from the sale of real estate taxed? 11. What is meant by an effective tax rate? What does it matter? 12. Do you think taxes affect the value of real estate versus other investments? 13. What is the significance of the passive activity loss limitation (PAL) rules for real estate investors? 1. You are an employee of University Investment Consultants, Ltd. and have been given the following assignment. You are to present an investment analysis of a new small residential income producing property for sale to a potential investor. The asking price for the property is $1,250,000; rents are estimated at $200,000 during the first year and are expected to grow at 3 percent per year thereafter. Vacancies and collection losses are expected to be 10 percent of rents. Operating expenses will be 35 percent of effective gross income. A 70 percent loan can be obtained at 11 percent interest for 30 years. The property is expected to appreciate in value at 3 percent per year and is expected to be owned for five years and then sold. a. What is the investor's expected before tax internal rate of return on equity invested? (BTIRR)? b. What is the first year debt coverage ratio? c. What is the terminal capitalization rate? d. What is the NPV using a 14 percent discount rate? What does this mean? e. What is the profitability index using a 4 percent discount rate? What does this mean? 2. (Extension of problem 1) You are still an employee of University Consultants, Ltd. The investor tells you that she would also like to know how tax considerations affect your investment analysis. You determined that the building represents 90 percent of value and would be depreciated over 39 years (use 1/39 per year). The potential investor indicates that she is in the 36 percent tax bracket and has enough passive income from other activities so that any passive loans from this activity would not be subject to any passive activity loss limitations. Capital gains from price appreciation will be taxed at 20 percent and depreciation recapture will be taxed at 25 percent. a. What is the investor's expected after tax internal rate of return on equity invested (ATIRR)? How does this compare with the before tax IRR (BTIRR) calculated earlier? b. What is the effective tax rate and before-tax equivalent yield? c. How would you evaluate the tax benefit of th investment? d. Recalculate the ATIRR in part (a) under the assumption that the investor cannot deduct any of the passive losses (they all become suspended) until the property is sold after five years.
Expert Answer:
Answer rating: 100% (QA)
SECTION A 1The primary benefits from investing in real estate income property are potential cash flow from rental income appreciation in value tax advantages and the ability to use leverage to purchas... View the full answer
Related Book For
Real Estate Finance and Investments
ISBN: 978-0073377339
14th edition
Authors: William Brueggeman, Jeffrey Fisher
Posted Date:
Students also viewed these accounting questions
-
Why should investors be concerned about market rents if they are purchasing a property subject to leases?
-
How do you think expense stops and CPI adjustments in leases affect the riskiness of the lease from the lessors point of view?
-
Why should investors be concerned with GDP growth?
-
What is a self-imposed budget? What are the major advantages of self-imposed budgets? What caution must be exercised in their use?
-
SpinTheWheel Co. has assets currently worth $10 million in the form of one-year risk-free bonds that will return 10 percent. The company has debt with a face value of $5.5 million due in one year....
-
Yolanda, your tax client, recently started her own business as a healthcare consultant and set up an office in her home used exclusively for client meetings and other business-related activities....
-
You are conducting a survey on the number of people per house in your region. From a sample with n = 60, the mean number of people per house is 3 and the standard deviation is 1 person. Using...
-
Crown Turf manufactures lawnmowers, weed-trimmers, and chainsaws. Its sales mix and contribution margin per unit are as follows. Crown Turf has fixed costs of $4,600,000. Instructions Compute the...
-
Sudoku is a fun little logic puzzle where the objective is to fill a 9x9 grid with digits so that each column, each row, and each of the nine 3x3 sub-grids contain all digits from 1 to 9. Solving one...
-
The spool has a mass of 30 kg and a radius of gyration k o = 0.25 m. Block A has a mass of 25 kg, and block B has a mass of 10 kg. If they are released from rest, determine the time required for...
-
27. A typical fat in the body is glyceryl trioleate, C57H10406. When it is metabolized in the body, it combines with oxygen to produce carbon dioxide, water, and 3.022 x 104 kJ of heat per mole of...
-
What do you know about dramatic theory and symbolic interaction?
-
A small printing firm CreateUrCards is currently keeping its accounting records in paper journals and ledgers. It is a very tedious way to maintain records and a new staff member (Jesse) at...
-
Other than the wind speed, what factor has the most impact on the amount of power generated by a wind turbine? Swept area of rotor Turbine style Terrain Blade material.
-
Match each leadership theory with a corresponding related management approach: leadership theories: situational leadership, transformational leadership, Theory "Y", Theory "X" management approach:...
-
What is NOT true about cash? Question 6 options: Cash flows are a better indicator of a company's financial health than profits. A longer cash-to-cash cycle is normally preferred because it means the...
-
As the start-up company group refines the plans for its product launch, they are noticing ongoing changes in the global supply chain. The start-up has only one manufacturing site at this time. Please...
-
A woman at a point A on the shore of a circular lake with radius 2 mi wants to arrive at the point C diametrically opposite on the other side of the lake in the shortest possible A time. She can walk...
-
What is the relationship between a discount rate and a capitalization rate?
-
You have been asked to develop a pro forma statement of cash flow for Betts Distribution Center, an Internet-based order fulfillment/distribution/office/warehouse property. In addition to recoverable...
-
An institutional lender is willing to make a loan for $1 million on an office building at a 10 percent interest (accrual) rate with payments calculated using an 8 percent pay rate and a 30-year loan...
-
Scores for the California Peace Officer Standards and Training test are normally distributed, with a mean of 50 and a standard deviation of 10. An agency will only hire applicants with scores in the...
-
1. Find the z-score that corresponds to a cumulative area of 0.3632. 2. Find the z-score that has 10.75% of the distributions area to its right.
-
Find the z-score that corresponds to each percentile. 1. P 5 2. P 50 3. P 90
Study smarter with the SolutionInn App