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An investor is considering the acquisition of a distressed property which is on Northlake Banks...

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Finance

An investor is considering the acquisition of a distressed property which is on Northlake Banks REO list. The property is available for $200,800 and the investor estimates that he can borrow $160,000 at 4.5 percent interest and that the property will require the following total expenditures during the next year:

Inspection $ 512
Title search 1,024
Renovation 13,000
Landscaping 824
Loan interest 7,212
Insurance 1,812
Property taxes 6,012
Selling expenses 8,000

Required:

a. The investor is wondering what such a property must sell for after one year in order to earn a 20 percent return (IRR) on equity.

b. The lender is now concerned that if the property does not sell, investor may have to carry the property for one additional year. He believes that he could rent it (starting in year 2) and realize a net cash flow before debt service of $1,440 per month. However, he would have to make an additional $7,440 in interest payments on his loan during that time, and then sell. What would the price have to be at the end of year 2 in order to earn a 20 percent IRR on equity?

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