An investment property is purchased for $18,540,000 with 50% equity and an interest-onlyloan to finance the balance. The average appreciation rate of the property is 5% per annumAll operating costs, including finance costs, are exactly equal to rent income. If the property issold after 10 years and selling costs are 3% of the sale price (based on market valuation ofdetermined from the annual rate of appreciation), the ROE (return on equity) is.
Question
An investment property is purchased for $18,540,000 with 50% equity and an interest-onlyloan to finance the balance. The average appreciation rate of the property is 5% per annumAll operating costs, including finance costs, are exactly equal to rent income. If the property issold after 10 years and selling costs are 3% of the sale price (based on market valuation ofdetermined from the annual rate of appreciation), the ROE (return on equity) is.
Solution
First, let's calculate the sale price of the property after 10 years using the annual appreciation rate:
Sale Price = Purchase Price * (1 + Appreciation Rate) ^ Years Sale Price = 18,540,000 * 1.63 Sale Price = $30,200,200
Next, let's calculate the selling costs:
Selling Costs = Sale Price * Selling Cost Rate Selling Costs = 906,006
Now, let's calculate the net sale proceeds:
Net Sale Proceeds = Sale Price - Selling Costs Net Sale Proceeds = 906,006 Net Sale Proceeds = $29,294,194
The initial equity investment was 50% of the purchase price:
Equity Investment = Purchase Price * Equity Percentage Equity Investment = 9,270,000
The return on this investment is the net sale proceeds minus the initial equity investment:
Return = Net Sale Proceeds - Equity Investment Return = 9,270,000 Return = $20,024,194
Finally, let's calculate the Return on Equity (ROE) by dividing the return by the initial equity investment:
ROE = Return / Equity Investment ROE = 9,270,000 ROE = 2.16 or 216%
Therefore, the return on equity (ROE) for this property after 10 years is 216%.
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