You are advising an investor on whether to buy a beach house as an investment property. His plan is to buy the house, financing it partly with debt and partly with equity and then sell it in 15 years. The big attraction is that the house can be rented with rental proceeds serving as revenue. Consider the assumptions below and critically valuate the investment.
Cost of house $1,500,000
Down payment 20%
15-year mortgage (4.5% interest rate) for rest of the 80%
Annual maintenance on the property of $10,000
Annual costs to own (taxes, insurance, cable, electric, water, etc.) $45,000 escalating 5% every year
Depreciation straight-line 15 year
Rental income (after fees) of $85,000 escalating at 4% every year
Taxes on income of 35%
Houses on the beach increase in value ever year by 3%
The investor considers his personal discount rate of 12.5%
The beach is nice and sunny 210 days a year with average temperatures of 84 degrees
Evaluate the investment from an investors perspective (returns, IRR, NPV, payback, break even sales price, etc.). Run all your analytics in excel and build a 15-year model where the house is bought and eventually sold debt free. What advice do you have for the investor?