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Lesson10_Investment

# 8 real estate fundamentals texas tech university

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Unformatted text preview: PV of Investment w/o Leverage? NPV discounted at 10%: \$862,764 (IRR = 12.14%) What is NPV with a \$6m IO 8% FRM Loan? NPV discounted at 10%: \$1,317,658 (IRR = 17.55%) Practice Problem: NPV & IRR You have been given the opportunity to invest in the following apartment building: NOI: \$10,000 per month Mortgage Loan: \$700k 10 year FRM @ 7.2 % Anticipated Holding Period: 5 years (ie, 60 months) Going out Capitalization Rate: 12% Selling expenses of 5% What is the NPV of associated cash flows? Annual Discount Rate of 10.8% What is the IRR given a purchase price of \$1.1m? WHAT ABOUT TAXES? Tax System Generally Prefers Real Estate Lower Marginal Tax Rates for Capital Gains Deductions for Interest and Depreciation IRS Has Several Categories of RE Property Classifications matter and often disputed Affect amount of taxes due on sale Influence tax rates and allowable deductions Dr. Eriksen Lesson 10: RE Investment 25 26 28 9 Real Estate Fundamentals Texas Tech University PERSONAL INCOME TAX Applied on Income Earned from Salaries, wages, commissions, and bonuses Based on Adjusted Gross Income (AGI) Able to Deduct Either Standard or Itemized Expenses EFFECTIVE TAX RATES Suppose your AGI = \$100,000 Marginal Tax Rate = 28% Total Taxes = \$21,616.32 \$8,925 x 0.10 = \$892.50 [\$36,250 \$8,926] x 0.15 = \$4098.60 [\$87,850 \$ 36,251] x 0.25 = \$12899.75 [\$100,000 \$87,851] x 0.28 = \$3401.72 Effective Tax Rate = 21,292 / 100,000 = 21.3% This will be lower than your marginal tax rate MARGINAL v. AVERAGE TAX RATES Marginal Tax Rate = Amount of Tax on Each Additional \$1 of Income Average Tax Rate = Total Taxes Owed Divided by AGI Dr. Eriksen Lesson 10: RE Investment 29 • Marginal Tax Rate AGI Single AGI Married Filing Jointly 10% Not over \$8,925 Not over \$17,850 15% \$8,926 \$36,250 \$17,851 \$72,500 25% \$36,251 \$87,850 \$72,501 \$146,400 28% \$87,851 \$183,250 \$146,401 \$223,050 33% \$183,251 398,350 \$223,051 \$398,350 35% 39.6% \$398,351 \$400,000 Over \$398,351 \$450,000 Over \$400,000 Over \$450,000 30 31 40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00%...
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