You are deciding to purchase an investment property in an ideal location you prefer. You would
addressthe following issues before buying the property (ignore all the taxes, realtor agency fee, the
transition fee in the calculation. Only consider the purchasing price as the total cost. Also, ignore
the house insurance fee, etc. Only consider monthly mortgage and rent.):
1) Decide the location and the specific real estate property you would like to buy (e.g., a
single-family house or a condo). Please provide justification why the property is chosen,
And e.g., affordability, and the potential for price appreciation. You could use the resource
like zillow.com, etc. (2 points)
2) Find out the mortgage rates for different properties and choose between a 30 or 15-year
fixed-rate mortgage (FRM). You could use bankrate.com, etc. You must justify your
decision. (2 points)
3) Calculate the monthly mortgage payment given the down payment (20% of the price) you
will make. This will be a fixed 80% payment mortgage loan with 20% down payment. It
means you will pay 20% down payment at the purchase and finance 80% with the
mortgage. Please show your calculations of monthly mortgage payments in the report. (4
points)
4) In the meantime, predict the amount of monthly rental you will be able to collect when you
lease the property out (zillow.com also provides rental price information). The rental period
is the same as your mortgage period. In other words, you will pay off your mortgage and end the
rental in the same year. Justify your rental income projection. (4 points)
5) Project the resale value of the property at the end of the mortgage payment period. You
need to use some statistics to back up your numbers. (4 points)
6) Once you have
a. the projected monthly mortgage payment
b. the monthly rental income
c. the resale value of the property at the end of the mortgage payment period
You could calculate the net present value (NPV) of the cash flow of a, b, and c respectively.
The present value must be calculated in Excel or using a financial calculator to get
the credit. The discount rate is the mortgage rate. The return on your investment property
is calculated as return = (Sum of NPV in a, b, and c/ the down payment) – 1. The calculation
needs to be shown in the report. (12 points)
7) Next, assume you don’t purchase an investment property. Instead, you invest the same
amount of your total investment in the house in the S&P500 index. Over the past 30 years,
the S&P 500 index has delivered a compound average annual growth rate of 10.7% per year. Which
one could you invest in? You need to consider the factors more than the return. Justify
your conclusion. (2 points)
