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Primarily, an investment property is one purchased strictly for the purpose of generating income. It’s neither your current primary residence nor a vacation home used only by your family. An investment property is usually purchased with the intention of either renting it out or renovating it to resell at a profit. There are also some variations on that theme. For instance, when a family relocates or decides to downsize, a primary residence can become an investment property if it doesn’t need to be sold. Another investor may buy a multifamily property, choosing to live in one part while renting out the other. Other owners may. | Real Estate Investment Analysis Fall 2004 Midterm Exam 1 - Version A - Solutions Dr. Stanley D. Longhofer MW 9 30-10 45 1 14 points Amy is considering investing in a 75 000 square foot retail property. The current lease is a triple-net lease at 7 per square foot this payment is scheduled to increase to 8.50 per square foot after three years beginning in year four and remain at that rate for ten more years. Amy s expected holding period is five years and her required return on any investment is 12 percent. a 7 points Assuming that Amy can sell the property at an 8.00 percent cap rate at the end of the fifth year what is the most she would be willing to pay for this property In years one through three the property will generate income of 75 000 X 7.00 525 000. Staring in year four the income will be 75 000 X 7.50 637 500. The reversion value at then end of the fifth year will therefore be 637 500 - 0.08 7 968 750. Enter the following into your irregular cash flow worksheet Cash Flow Frequency 525 000 3 637 500 1 8 606 250 1 Solving for the NPV with CF0 0 and I 12 gives PV 6 549 522 or just over 6.5 million. b 5 points Calculate the current market value of this property assuming that its reversion value will be based on a 4 percent increase in market value per year. The present value of annual income from this property is solve by entering the following into your irregular cash flow worksheet Cash Flow Frequency 525 000 3 637 500 2 With this PVnoi 2 027 839. The current market value of the property is therefore Real Estate Investment Analysis - Midterm Exam 1 - Version A - Solutions V P X 1 11 1 G T I I 1 r T J 2 027 839 X 7--1 -V c 1.045 J 1 -5 I 1.125 J 6 549 053. c 2 points If she pays this price what is Amy s going-in cap rate R 525 000 - 6 549 053 8.02 . 2 Real Estate Investment Analysis - Midterm Exam 1 - Version A - Solutions 2 20 points Frank is considering investing in an apartment complex located on Long Island. The complex has 120 units broken down as .
