Question

Suppose an investor is considering a non-residential rental property that has an asking price of $400,000. The land is valued at $175,000. The property has four rental units that are expected to rent for $1.200 each per month for the next five years (PGI each year of $57,600). Vacancy and bad debt allowance is expected to be 5% of potential gross income Operating expenses are expected to be 16% of effective gross income. A mortgage loan is available for 80% of the purchase price at 8% annual interest with annual payments over 25 years. The investor faces a 28% tax rate and expects to buy this property on January 1, keep it for 5 years (through December 31 five years later, then solltfor $400,000 (less 5% selling expenses), and assuming that the property is sold as expected, what is the BTER? $400,000 $380,000 $294,321 $85.679

Answer 1

Before tax equity revision (BTER)= Sale price- selling expense - loan balance

= $400000- $400000*5% - $256000

=$124000.

Calculation of loan balance:

loan amount= $400000*80%= $320000

loan balance after 5 years= $320000*(25-5)/25= $256000