Answered: 1. Calculate the rental yield on the…

Pfin (with Mindtap, 1 Term Printed Access Card) (mindtap Course List)

7th Edition

ISBN:9780357033609

Author:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Publisher:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Chapter13: Investing In Mutual Funds, Etfs, And Real Estate

Section: Chapter Questions

Problem 6FPE

See similar textbooks

Related questions

Concept explainers

Question

100%

You are considering investing in real estate—both for the short-term cash flows and the potential long-term capital gains—and are evaluating both a commercial lease property (such as a strip shopping center or an office building) and a residential rental property (such as several rental houses or a small apartment complex). It is likely that you will invest in only one of these properties at this time.

The general data regarding these investments is as follows:

propertytype

price

mortage

rental income (per year)

depreciationexpense

(per year)

Estimatedresalevalue

small office

$800,000

$448,000

$136,016

$7,692

$912,000

rental homes

$650,000

$292,500

$91,281

$8,273

$685,100

The first potential investment consists of an office building with ten offices, which has a current market price of $800,000. Of this amount, $200,000 represents the cost of the land, and the balance, $600,000, is attributable to buildings on the property. The second possible investment, which costs $650,000, consists of a tract of land containing three rental houses. $195,000 of the investment's total price is reflects the cost of land, and the remaining $455,000 is associated with structures on the land. For both properties, you believe you can increase the rents 2% per year for each of the next four years, and expect to sell either property at the end that time. You desire a return of 7% on your investments.

1. Calculate the rental yield on the Commercial property and Consumer property

2.Based on the respective yields, which one is the better investment?

3. Calculate the price to rent ratio for both properties, which one is the better investment?

4. calculate the Loan -to- Value ratio for both properties, which one is the better investment?

Expert Solution

Trending now

This is a popular solution!

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.