Premium Essay

Revere Case

In: Business and Management

Submitted By serebni
Words 700
Pages 3
Mortgage: $450,000 20yr 8% Interest Potential Gross Income

$91,200
Less: Allowance for Vacancy @ 5%

4,560
Effective Gross Income

$86,640
Less: Operating Expenses

Total $25,194

Real Estate Taxes

7,800

Utilities

4,330

Insurance Fee

2,600

Maintenance Fee

1,800

Management Fee @ 5%

4,332

Repairs @ 5%

4,332
Net Operating Income

$61,446
Less: Annual Debt Service

45,900
BTCF from Operations

$15,546
Less: Income Tax

3,003.89
ATCF from Operations

$ 12,542.11

Equity Dividend Rate = BTCF / Initial Cash Outlay
EDR = $15,546 / $99,000 = 0.15703 ≈ 15.7%

Income Tax Calculation Mortgage: $450,000 Net operating Income

$61,446
Less: Interest

35,656.01
Less: Depreciation

15,061.81
Less: Amortized Finance Costs

0
Taxable Income

$10,728.18
Tax Rate @ 28%
Income Tax

$ 3,003.89

Cap Rate = 10.9% was given from the case.

Costs: Mortgage: $450,000 Mortgage: $400,000
Acquisition Cost

$ 350,000

$ 350,000
Remodeling

165,000

165,000
Real Estate Taxes (from Escrow)

1,300

1,300
Mortgage Origination Fee

4,500

0
Carrying Costs

24,700

24,700
Legal Fees

3,500

3,500
Total Cost

$ 549,000

$ 544,500
Less: Mortgage Amount

450,000

400,000
Total Cash Needed

$ 99,000

$ 144,500

This would require Alexander to obtain an extra $19,000 (99000-80000) if he were to take on the $450,000 mortgage and would require him to obtain an extra $64,500 (144500-80000) if he were to take on the $400,000 mortgage as he already has $80,000 in equity. Alexander would need to seek further financial leverage to obtain the extra cash needed for his investment. Under these circumstances we would recommend that Alexander obtain the $450,000 mortgage considering he would have to obtain

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