You are considering investing in an apartment complex. The apartment complex has

Question

You are considering investing in an apartment complex. The apartment complex has five units and costs $2,000,000. Your bank requires you to invest $400,000 (10%) as a downpayment. The balance of $1,600,000 can be borrowed on terms of 7% for 30 years, level payment. You plan to sell the apartment complex in 10 years. The apartment complex will appreciate 8% per year. The rent from each unit is $2,500 per month.

1) Does the loan payment cover the total rent on a monthly basis?

2) Assume that the revenue and all expenses net to ZERO, what is the return on investment after ten years, assuming you sell the building and pay back the loan?

Explanation / Answer

1.Loan amount payable along with interest:

$1600000 + $1600000*7% (interest) = $1712000

$1712000/ (30 years*12 months) = $4756

Rent each month payable = $2500* 5 units = $12500.

Hence,rent payment $12500 per month covers monthly loan payment of $4756.

2.Future Value of apartment after 10 years = $2000000* Future value @8% for 9 years.

= $2000000* (1.08)9

   = $3998009

Loan amount including interest = $1600000 + $1600000*7% (interest) = $1712000

Down payment = $400000

Return on investment = $3998009 - $1712000 -$400000 = $1886009.

Therefore, Return on investment = $1886009.

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