Five years later, you are offered your dream job in Costa Rica. You need to sell

Question

Five years later, you are offered your dream job in Costa Rica. You need to sell this house in order to purchase a new one in Costa Rica. Rents have increased since you purchased the home and you estimate that the home will rent for $1700 per month (net). You have found a high quality tenant willing to sign a five year lease under the following conditions. Rent will be $1,700 for the first two years, and increase by 2 percent each year for the remaining three years. The average investor’s holding period on residential rental properties is five years. You have estimated sale proceeds will be $302,411.23 at the end of the investor’s holding period. The appropriate discount rate is 4%.

A) What is the minimum price you should list the property for (i.e. the maximum an investor would be willing to pay)? Round up to the nearest whole dollar. *Remember, the value of an investment property comes from its cash flows. That is, you need to consider both the estimated sales price at the end of your holding period AND the stream of cash flows the investor will receive from rent while they own the property. *hint: write down your answer with all six decimal places as you will need the unrounded value to get correct answers for the remaining questions.

B) What will the investor’s “going-in” IRR be if they pay exactly list price? Enter your answer as a whole number.

Assume you saved the rent money from your best friend rather than putting the additional $500 towards your mortgage payments. You will close on the home after making your last payment in year 5. How much will your loan payoff amount be (in other words, what is the outstanding balance on your loan after 5 years)? Round to the nearest whole dollar.

C) Assuming you sell the home for exactly list price, pay a 6% real estate broker commission and $3,500 in Seller closing costs, what will be your net proceeds from the sale? Round to the nearest whole dollar. *don’t forget to include your loan payoff amount.

Explanation / Answer

A) Minimum Price = Present Value of (Rents to be received + Sales proceed)= =1700*(1-(1+4/(100*12))^(-5*12))/(4/(12*100)) + 302411.23/(1.04)^5 = 342568.40

B) IRR can be calculated using 2 ways

1 by trial and error

and other using excel

However in this case, 4% be will the IRR as the investor is purchasing at the same price as the present value

C) Net proceeds from sale will be = 342568.40*(1-0.06) - 3500 = 318514

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