The following article focuses on the financial analysis of a real estate investment. This is a financial model that answers a question from the former ModelOff exam. In summary, an investor decides to invest in a rental property. To do this, he must borrow a certain amount of money. In particular, we want to know what performance it will be able to do over the next 10 years. Let’s review each of the modeling steps in this investment project.
Beyond the cost of the building, the initial investment also includes initial bank charges and investments in furniture, to fill the rental building. Here is the information in this regard.
This project is partly financed by equity and partly by mortgage loan. This mortgage is $ 900,000. The balance therefore represents the equity.
The initial rent is $ 83,200 and increases by 2% for the first 2 years and 5% thereafter. The operating costs of the building consist of agency costs, of the order of 9% of rental income, maintenance costs, about 5% of rental income and interest expenses ( note that the interest expense is calculated on the principal, determined in the next point). All these revenues and expenses are taxable at 35%.
The total net income generated by the rental property will be used to repay the principal of the mortgage loan. We can calculate the opening and closing balances of the mortgage loan.
Resale of the building
It is estimated that the value of the building will have doubled in 10 years. In addition, it is assumed that growth will occur at a steady annual rate. To find out how to determine this rate, you can re-read the article Compose a compound annual growth rate (CAGR) . The tax on the capital gain is estimated at 20%. To find the capital gain, simply deduct the initial investment from the amount of the resale.