Question

you own and operate apartment complexes in the Jersey area. One of your company’s properties, Concordia Apartments, was just purchased by your firm for $2,200,000. The property is composed of 9 luxury apartments each of which are rented out for $2000 per month. (All units are currently rented out under long-term leases) Operational costs for the entire apartment complex amount to $11,500 per month.
  
Your firm expects to be able to reinvest the monthly net income from the property at an annual reinvestment rate of 3% over the next 12 years. At the end of that 12 year period your company intends to sell the property for $3,500,000.
  
Based upon this information, calculate your company’s Horizon Yield for this investment.
  
(Walk yourself through the 5-step process to calculate the Horizon Yield, labeling each step) Show clearly all work, carrying all calculations out to four (4) decimal places. Highlight in bold your answer.

Answer 1

Answer;

Purcahse price P=2200000

Total Rent per month =9*2000=18000

Operational cost per month =11500

Net income per month N=18000-11500=6500

Monthy reinvestment rate i=3%/12=0.25%

Number of months n=12*12=144

1)

So Fv of net Income A=N*((1+i)^n-1)/i = 6500*((1+0.25%)^144-1)/0.25%=1124982.65

2)

Sale price at end of 12 years =3500000

3)

Total Future value B=3500000+1124982.65=$4624982.65

4)

Let r be the monthly holding return

P*(1+r)^144=B

2200000*(1+r)^144=4624982.65

r=0.517%

5) Annual Holding return =12*0.517% =6.21%