Joshua Michaels officially formed a real-estate investing and consulting firm called Citadel, LLC with his business partner, Jim Thompson. He is obtaining a better understanding of many aspects of real estate from both a legal and financial perspective.
Before an initial advisory board meeting, he realized that he needed to be better prepared to address specific and more complex real-estate scenarios than what he has been accustomed to in the past. Luckily, with your assistance, he was able to have valuable information readily available to review and report. Now, he has come to you again with additional concerns.
- Joshua and Jim have owned a property for 15 years, the value of which is now $200,000.The balance on the original mortgage is $100,000, and the monthly payments are $1,100, with 15 years remaining. They would like to obtain $50,000 in additional financing. A new first mortgage can be obtained at a 5% rate and a second mortgage for $50,000 at a 7% rate with a 15-year term. Alternatively, a wraparound loan for $150,000 can be obtained at a 6% rate and a 15-year term. All loans are fully amortizing. Which alternative should be selected?
- Explain the disclosure requirements under the Truth-In-Lending Act. In your discussion, include several examples of disclosures that are required for a fixed-rate mortgage note, as well as an adjustable-rate mortgage note. Also, what should Citadel, LLC expect to view within a closing statement? Provide several examples of critical items that should be reviewed.
- Courtney Baxter has presented Joshua with yet another opportunity: It is related to a commercial property investment. Based upon a market analysis involving the review of supply and demand, rents, and estimated operating expenses, annual net operating income (NOI) is estimated as follows:
|
Year
|
NOI
|
|
1
|
$1,000,000
|
|
2
|
$1,000,000
|
|
3
|
$1,000,000
|
|
4
|
$1,100,000
|
|
5
|
$1,200,000
|
|
6
|
$1,250,000
|
|
7
|
$1,287,500
|
|
8
|
$1,326,125
|
|
|
|
- There is the expectation that Citadel, LLC should be able to earn a 10% return on an investment like this venture. And, starting from year 6 to year 7 and every year thereafter, the NOI is expected to grow at 3% per year indefinitely. Assuming this investment is expected to produce NOI in years 1-8 and be owned for seven years and then sold, what would be the value for this property today?
- Why should Joshua and Jim consider building a portfolio by investing in real estate income property? Are there any special considerations that should be taken into account when it comes to taxation of income property? What about depreciation?
- American National is willing to make a loan for $750,000 on a commercial property at a 9% interest (accrual) rate with payments calculated using a 7% rate and a 30-year loan term. After the first five years, the payments are to be adjusted so that the loan can be amortized over the remaining 25-year term. What is the initial payment? What will the balance be after 5 years?
- How should Citadel, LLC go about analyzing the risk of different properties and investments? What is the difference between business and financial risk, and what should be more important to take into consideration? Finally, explain the concept of a real option and how this can help Joshua and Jim as they continue with their business.