Reference no: EM131527644
You are considering buying a house to rent out as investment property. The price of the house is $1,200,000 (consisting of $1,050,000 in land value, and $150,000 in building value). You can finance 75% of this ($900,000) via a bank mortgage at a rate of 3.5% compounded annually (for simplicities sake, calculate all mortgage payments on an annual basis). You will incur closing costs (land transfer tax, legal fees, etc) of $28,000. Additionally, you would like to spend $75,000 to renovate the house before renting it out. The down payment for the house as well as all the additional fees and renovations will come from your personal savings, which you would otherwise invest in some other manner. Your personal marginal income tax rate is 38%.
Determine a suitable Minimum Acceptable Rate of Return (MARR) for this investment. Then, based on this MARR, determine the after tax NPV (using net cashflows), including the effects of inflation. Assume you'll purchase and amortize the house over 25 years, which you will then sell it to fund for your retirement in the Bahamas.
*Other relevant data:
-Building CCA Class 3 (4%)
- Maximum allowable rent increase in BC (this year): 3.7%
- Mortgage term: 5 years
- General Inflation Rate (last five years): 1.8%
- Housing Specific Inflation Rate (last five years): 15%
- Expected annual rent in year 1: $35,000
- Expected annual expenses in year 1: $17,000 (property tax, maintenance, tenant related expenses)