Anne Hathaway has just bought the Shakespeare Apartments in the growing community of Elizabethtown. The price was $600,000 or $15,000 per unit. Ms. Hathaway assumed the original mortgage. The performance of the property over the past three years has averaged:

Rent Revenue (PGI) $100,000

Less Vacancy & Collection Loss (3%) (3,000)

EGI $97,000

Less: Operating Expenses (41,560)

Net Operating Income $55,440

After analyzing the rents of the Essex House and The Raleigh properties nearby, Ms. Hathaway feels she can raise the unit rents by $10 per month; however, this will increase the vacancies to 5%. She will then be able to refinance the property and withdraw $140,126.73 of tax-free (actually tax-deferred) monies.

The mortgage she assumed on purchase was originally $540,000 at 7½% annual interest payable in level monthly installments over 21 years. The mortgage was eight years old at the time of Ms. Hathaway’s purchase. The new mortgage would be for 25 years at 8½% annual interest payable in level monthly installments.

Please answer the following questions – showing all steps and mathematics – on a separate sheet of paper and numbering each of your answers to relate to the question being answered. Round your answers to two (2) decimal where appropriate

1. What do you believe Ms. Hathaway’s equity yield will be (approximately) with the new mortgage?

2. If she refinances, will Ms. Hathaway enjoy positive or negative leverage?

3. Do you think Ms. Hathaway should refinance the property and, if so, why?