Video: Real Estate Investment for CFA Exam
Video: Real Estate Investment for CFA Exam
Question:
John bought a shopping mall for $3.2 million with $200k down payment. The loan is borrowed at 12% for 30 years. Depreciation is $50k per year. Assume the gross rental income is $500k per year but maintenance fee and taxes are $40k per year and John’s marginal tax rate is 30%. What is the first year cash flow for John?
Answer:
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This question is actually testing your knowledge of amortization, taxation and cash flow. We first have to know how to calculate amortization and taxation.
John borrowed 3 millions (because he has 200k down payment). Using calculator, the yearly payment will be:
• PV=3000000, I/Y = 12, N =30, FV =0
• CPT PMT = 372431
Among that, 360000 (3M x 0.12 = 360k) are interest and 372431 – 360000 are principal.
And note that only interest payment can reduce tax.
So, we can use the following tables to calculate the tax and cash flow.
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Gross Income 500000 |
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Gross Income 500000 |
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minus |
Maintenance and taxes 40000 |
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minus |
Maintenance and taxes 40000 |
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minus |
Depreciation 50000 |
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minus |
Interest 360000 |
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minus |
interest + principal 360000+12431 |
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x |
marginal tax rate 0.3 |
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minus |
tax 15000 |
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tax 15000 |
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Cash Flow 72569 |
So, the tax flow is 72569.
Thank you so much for all the videos. Your way of explaining is excellent. I think at the end it should be “Cash Flow” instead of “Tax flow”.
Thank you so much for all the videos. Your way of explaining is excellent. I think at the end of this vide, it should be ‘Cash flow” Instead of “Tax flow”.