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

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Finance

n investor is considering the acquisition of a distressed property which is on Northlake Banks REO list. The property is available for $203,200 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 $ 548
Title search 1,096
Renovation 13,000
Landscaping 896
Loan interest 7,248
Insurance 1,848
Property taxes 6,048
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 $2,160 per month. However, he would have to make an additional $8,160 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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