Suppose you are buying a beach house condo for $450,000. You are planning to fin

Question

Suppose you are buying a beach house condo for $450,000.

You are planning to finance the ENTIRE amount of the condo via a mortgage for 30 years, 5% fixed, 0-points.

The HOA fees, property taxes, Annual maintenance + Upkeep of the condo = $12,000 per year.

Utilities are $150/month

You are planning to rent this condo, and your rental income is $40,000 per year (gross), which goes up by 2% per year.

Expenses to rent out the property are 30% of the gross income per year.

Since this is an investment property, you will be depreciating it under residential rental property with 27.5 years depreciation.

Assume that the condo will appreciate by 3% annually.

1. Provide a detailed calculation representing the annual schedule of income, expenses, depreciation, taxable income for this investment, and property appreciation.

2. If your MARR is 5%, determine if this is a good investment based on TAXABLE INCOME and APPRECIATION only. Find the IRR for this investment.

Please, state all assumptions and show all your work.

Explanation / Answer

Soln : Please refer the table calculations are done as per the given data, Laon EMI is calculated by using the excel function PMT and considering an yearly payment.

For calculaing the IRR, we need to add back the depreciation in the taxable income and find out the IRR using the funcion in excel, we will get IRR as 12%, this is a good investment.

Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Value of condo 450000.00 463500.00 477405.00 491727.15 506478.96 521673.33 537323.53 553443.24 570046.54 587147.93 604762.37 622905.24 641592.40 660840.17 680665.38 701085.34 722117.90 743781.43 766094.88 789077.72 812750.06 837132.56 862246.53 888113.93 914757.35 942200.07 970466.07 999580.05 1029567.45 1060454.48 1092268.11 16363.64 Expenses -12000.00 -12000.00 -12000.00 -12000.00 -12000.00 -12000.00 -12000.00 -12000.00 -12000.00 -12000.00 -12000.00 -12000.00 -12000.00 -12000.00 -12000.00 -12000.00 -12000.00 -12000.00 -12000.00 -12000.00 -12000.00 -12000.00 -12000.00 -12000.00 -12000.00 -12000.00 -12000.00 -12000.00 -12000.00 -12000.00 Utilty expense -1800.00 -1800.00 -1800.00 -1800.00 -1800.00 -1800.00 -1800.00 -1800.00 -1800.00 -1800.00 -1800.00 -1800.00 -1800.00 -1800.00 -1800.00 -1800.00 -1800.00 -1800.00 -1800.00 -1800.00 -1800.00 -1800.00 -1800.00 -1800.00 -1800.00 -1800.00 -1800.00 -1800.00 -1800.00 -1800.00 Income 40000.00 40800.00 41616.00 42448.32 43297.29 44163.23 45046.50 45947.43 46866.38 47803.70 48759.78 49734.97 50729.67 51744.27 52779.15 53834.73 54911.43 56009.66 57129.85 58272.45 59437.90 60626.65 61839.19 63075.97 64337.49 65624.24 66936.72 68275.46 69640.97 71033.79 Cost -12000.00 -12240.00 -12484.80 -12734.50 -12989.19 -13248.97 -13513.95 -13784.23 -14059.91 -14341.11 -14627.93 -14920.49 -15218.90 -15523.28 -15833.75 -16150.42 -16473.43 -16802.90 -17138.95 -17481.73 -17831.37 -18188.00 -18551.76 -18922.79 -19301.25 -19687.27 -20081.02 -20482.64 -20892.29 -21310.14 Dep. -16363.64 -16363.64 -16363.64 -16363.64 -16363.64 -16363.64 -16363.64 -16363.64 -16363.64 -16363.64 -16363.64 -16363.64 -16363.64 -16363.64 -16363.64 -16363.64 -16363.64 -16363.64 -16363.64 -16363.64 -16363.64 -16363.64 -16363.64 -16363.64 -16363.64 -16363.64 -16363.64 Interest @5% -22500.00 -22161.34 -21805.75 -21432.38 -21040.34 -20628.70 -20196.48 -19742.65 -19266.12 -18765.77 -18240.41 -17688.77 -17109.55 -16501.37 -15862.78 -15192.26 -14488.22 -13748.97 -12972.76 -12157.74 -11301.97 -10403.42 -9459.93 -8469.27 -7429.07 -6336.87 -5190.06 -3985.90 -2721.54 -1393.96 Taxable income -24663.64 -23764.98 -22838.19 -21882.20 -20895.88 -19878.08 -18827.57 -17743.09 -16623.30 -15466.82 -14272.20 -13037.92 -11762.42 -10444.02 -9081.01 -7671.59 -6213.85 -4705.85 -3145.50 -1530.67 140.92 1871.61 3663.87 5520.28 7443.53 9436.46 11502.01 30006.92 32227.14 34529.69 Loan Calculation Principle 450000.00 443226.85 436115.05 428647.66 420806.90 412574.09 403929.65 394852.99 385322.49 375315.47 364808.10 353775.36 342190.98 330027.38 317255.61 303845.24 289764.36 274979.43 259455.26 243154.87 226039.47 208068.30 189198.57 169385.35 148581.47 126737.40 103801.13 79718.04 54430.79 27879.19 EMI 29273.15 29273.15 29273.15 29273.15 29273.15 29273.15 29273.15 29273.15 29273.15 29273.15 29273.15 29273.15 29273.15 29273.15 29273.15 29273.15 29273.15 29273.15 29273.15 29273.15 29273.15 29273.15 29273.15 29273.15 29273.15 29273.15 29273.15 29273.15 29273.15 29273.15 Interest 22500.00 22161.34 21805.75 21432.38 21040.34 20628.70 20196.48 19742.65 19266.12 18765.77 18240.41 17688.77 17109.55 16501.37 15862.78 15192.26 14488.22 13748.97 12972.76 12157.74 11301.97 10403.42 9459.93 8469.27 7429.07 6336.87 5190.06 3985.90 2721.54 1393.96 Principle deduction 6773.15 7111.80 7467.39 7840.76 8232.80 8644.44 9076.66 9530.50 10007.02 10507.37 11032.74 11584.38 12163.60 12771.78 13410.37 14080.88 14784.93 15524.17 16300.38 17115.40 17971.17 18869.73 19813.22 20803.88 21844.07 22936.28 24083.09 25287.24 26551.61 27879.19 Principle due 443226.85 436115.05 428647.66 420806.90 412574.09 403929.65 394852.99 385322.49 375315.47 364808.10 353775.36 342190.98 330027.38 317255.61 303845.24 289764.36 274979.43 259455.26 243154.87 226039.47 208068.30 189198.57 169385.35 148581.47 126737.40 103801.13 79718.04 54430.79 27879.19 0.00

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