Question

You have an opportunity to acquire a property form First Capital Bank. The bank recently obtained the property from a borrower who defaulted on his loan. First Capital is offering the property for $200,000. If you buy the property, you believe that you will have to spend (1) $10,500 on various acquisition-related expenses and (2) an average of $2,000 per month during the next 12 months for repair costs, etc., in order to prepare it for sale. Because First Capital Bank would like to sell the property ASAP, it is willing to provide $180,000in financing at 8 percent interest for 12 months payable monthly (interest only). Your market research indicates that after you repair the pretty, it may sell for about $225,000 at the end of one year. Furthermore, you will probably have to pay about $3,000 in fees and selling expenses in order to sell the property at that time.

a. Calculate the cash equity you need to spend to purchase this property after sales price, loan amount and acquisition fees.

b. Calculate the monthly expenses including repairs and interest.

c. Calculate the cash you will need to pay off the loan and selling expenses when the property is sold.

d. Calculate the IRR (yield) on equity if the property is sold for $225,000 If you wanted to earn a 20 percent return on equity compounded monthly, do you believe that this would be a good investment?

e. The investor would have to sale the property for what price in order to achieve the 20 percent return on equity?

Answer 1