Economist magazine article on real estate prices and weighted average cost of capital (WACC)
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1. Read the attached Economist magazine article on real estate prices and answer the following two questions:
· Discuss at least one factor that has an influence on housing demand that was not given much weight in the article.
· Discuss at least one factor that has an influence on housing supply that was not mentioned in the article.
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2. Given the following information on a real multifamily property for sale:
· Asking price: $389,000
· Number of units: 4
· Monthly rent per unit: $625 on one unit; $650 on two units; $675 on one unit
· Square feet per unit: 1,000
· Annual tax expense: $2,960
· Annual insurance expense: $750
· Annual utilities expense: $3,456
· Vacancy rate: 5%
· Assume an interest-only mortgage
· Assume no closing costs
· Analyze first year cash flows only
At what cost of capital does this property produce a net positive cash flow? Does it produce a positive first year cash flow at a 6.5% cost of capital? What other factors will you take into account if you were trying to acquire this property for investment purposes? Show all work in Excel file with included brief discussion.
Attached is the related lecture document.
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Demand Factor - a lot of the demand has been driven by speculators, those purchasing property in order to gain from rises in property values they expect. This demand has artificially increased prices and will ...
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