An investor is considering the acquisition of a "distressed property'' which is on Northlake Bank's REO list.
The property is available for $200,000 and the investor estimates that he can borrow $160,000 at 8 percent interest (interest-only loan) and that the property will require the following total expenditures during the next year:
Inspection $ 500
Title search 1,000
Renovation 13,000
Landscaping 800
Loan interest 12,800
Insurance 1,800
Property taxes 6,000
Selling expenses 8,000
All next year expenditures, except for selling expenses, are assumed to occur monthly.
The investor is wondering what such a property must sell for after one year in order to earn a 20 percent return (IRR) on equity. (Show and explain all necessary calculations.)
The lender now is concerned that if the property does not sell, he may have to carry the property for one additional year. He believes that he could rent it and realize net cash flow before debt service of $1,200 per month.
However, he would have to make an additional $12,800 in total annual interest payment on his loan during that time, and then sell.
What would the price have to be at the end of year 2 in order to earn a 20 percent IRR on equity? (Show and explain all necessary calculations.)