Assume that you are able to obtain a loan from the bank for up to $10,000,000 at 7% interest annually. You are to create a portfolio of real estate investments from real estate properties currently listed for sale. Select a minimum of 3 properties that you can purchase with this loan from any source, for example, Realtor.com. These investments can be from anywhere in the United States and from any price range (use current market values). Calculate the expected total cost of purchase for these investments. Calculate the expected annual payments for mortgage interest, property taxes, and insurance. Calculate expected gross rents and net operating income. Compare the expected net operating income to your expected mortgage interest, property taxes, and insurance payments. Make conclusions as to whether these investments are profitable based on your analysis. Use concepts found in the course to defend your position. You can make any realistic assumptions necessary.
Investing in Reality
Investor obtains a loan from the bank for up to $10,000,000 at 7% interest rate and wants to invest its money in US real estate. Investors will require creating a portfolio of real estate investments from three real estate properties. First property is situated in 3601 West 53rd Street, Chicago, IL, US. It is a multi-family home with two stories and 12 rooms in the area of 19215 sq. ft at the cost of $3,800,000. The address of second property is 4500 West Fullerton Avenue that is located in Chicago, IL, US. It is also a multi-family home with four stories and 36 rooms in 15681.6 sq. ft at $2,700,000 (REALTOR.com, 2012). Third property is 6134 North KENMORE Avenue located in Chicago, IL. It is a four stories multi-family home with 40 rooms at the value of $2,800,000.
Calculation of the Expected Total Cost of Purchase
Total cost of purchase includes the cost of property and property taxes of central and state government, which is applied on the property purchase. US government's property purchase tax is 5% of the cost of property (Property Tax International Ltd, 2008). On the other hand, Chicago's state government's property purchase tax is equal to 1.5% of the fair market value of the property (Chicago Home Estates, Inc, 2012).
Cost of First Property: Both US and Chicago government property purchases tax is equal to 6.5% of the cost of building. First property purchase tax is $247,000 (6.5% of $3,800,000). So, total purchase cost of first property is $4,047,000 ($3,800,000 + $247,000).
Cost of Second Property: Total government purchase tax on second property including central and local government is $175,500 (6.5% of $2,700,000). So, total purchase cost of second property is equal to $2,875,500 ($2,700,000+ $175,500).
In Third Property: Property tax on third property including federal and local government property tax rate, the total tax is $182,000 (6.5% of $2,800,000). So, total purchase cost of property would be $2,982,000 ...
The expert calculates the expected total cost of purchases for investments.