A multi-family property is for sale with an asking price of $2.75 million. You have been asked

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Question:

A multi-family property is for sale with an asking price of $2.75 million. You have been asked to conduct an analysis on a potential purchase of this property, based upon various assumptions, and using a 5 year investment horizon. The property is assumed to increase in value by 3.5% per year and be sold at the end of year 5 for that exact price. Year 1 gross rents are estimated to be $280,000 and to increase at 4% per year. Vacancies and collections are estimated at 8% of gross rents. Operating expenses are estimated to be 35% of Effective Gross Income (Gross rents less vacancies/collections). The purchase will be financed through a loan with a 75% LTV, a 30 year term and an interest rate of 5.25% - the loan will be interest only, no principal amortization. For depreciation purposes, 80% of the purchase price is attributable to the property structure with the balance attributed to land. Multi-family properties are depreciated over a 27.5 year life.

Factoring in both interest and depreciation (which are both tax deductible), what would be your Year 1 taxable income?"

		"a. $139,159"
		"b. $195,721"
		"c. $355,721"
		"d. ($20,841)"

Based on your analysis, the Year 1 equity dividend rate would be?"

		a. 10.2%
		b. 8.6%
		c. 24.4%
		d. 6.1%

Using the assumed appreciation rate given, what is your sale price in year 5?"

		a. $3.27 million
		b. $3.55 million
		c. $4.12 million
		d. $2.85 million

in order to calculate IRR and NPV for this potential investment, you must calculate cash flows for all five years being careful to include the proceeds from a hypothetical sale in year 5 per instructions. Recall that upon sale, the loan must be repaid (subtracted from sale price) before determining net proceeds from sale. Based on your analysis and after debt service each year, the IRR of this investment would be?"

		a. 14.6%
		b. 28.5%
		c. 20.3%
		d. 8.4%

Using a discount rate of 9% and the same cash flows used for the prior question, what is the NPV of this investment (rounded)?"

		a. $1.06 million
		"b. $374,000"
		c. $1.57 million
		"d. $635,000"

Based on the information in the question regarding depreciation, how much value is being attributed to the land at time of purchase?"

		"a. $550,000"
		b. $2.2 million
		"c. $687,500"
		"d. $275,000"

Assume a property had an NOI of $750,000 in year 5 and that the long term growth rate for NOI was estimated to be 3%. Using a discount rate of 8% and the forward-looking cash flow estimate, what is the reversion (sale) value of the property in year 5? Hint: need to use Cap rate based on figures provided."

		a. $15.0 million
		b. $9.38 million
		c. $25 million
		d. $15.45 million

Given an unlevered property return (i.e., ignoring any possible debt) of 9%, a cost of debt of 5% and a debt to equity (D/E) ratio of 80%/20% - what would be your expected return on equity for this investment? Ignore taxes for this question see Before Tax calculations per first few slides from Chapter 12."