Deliverable 5 ( Real Estate and finance ) Business 520

1

Real Estate Finance and Investment

Name

College

BUSI 520:

Professor:

October 8th, 2024

Market Analysis

Due to its high-end services and comfortable lifestyle, the house at 3015 Blodgett Dr, Colorado Springs, CO, is popular. Many factors are considered when doing a market analysis, including:

Provision of Extra Features: Many high-end single-family homes in Northwest Colorado Springs are currently for sale. In the top-end rental market, residences cost $1.3 million to $1.6 million within a mile, indicating considerable competition and demand.

Finding Vacancy and Sale Rates: This area's low vacancy rate of 5% indicates considerable rental unit demand. Homes in this neighborhood sell for about 30–60 days, making the market strong.

Prices and rates: it is reasonable to charge $5,500–$7,500 per month, which is the average rent. Based on these considerations, the house rental location seems good. The rental market is tempting since there are few unoccupied properties, and high-end homes are sought.

Tax Considerations

Tax impacts must be applied to pro forma cash flow.

Real estate taxes are $14,000 per year, or 1% of the purchase price. Earnings Duties: Federal and state taxes will significantly impact cash flow at 25% (Berry, 2021). Methods for cash flow calculation:

Pretax Cash Flow shows -$7,679.48 annually.

Tax implications: Negative cash flow can pay taxes. Changing the taxed income may result in a modest tax obligation if the property's reduction in value is a tax shield.

After-tax cash flow: Still negative after taxes, but less negative after-tax savings. This is because tax exemptions reduce income tax.

Internal Rate of Return (IRR)

Pre-tax IRR is expected to be 5%. Using the estimated five-year financial flows, including rental income and sale proceeds, to calculate this value. The internal rate of return (IRR) compares the initial investment to the predicted cash flows from rental income and property sales to determine investment profitability (Hazen & Magni, 2021).

Mortgage interest deductions can boost cash flow by lowering taxed income. You can compare it to other investments better with an after-tax IRR closer to 6% or 7%. This number indicates how much these deductions can affect the property.

Plans to reduce risks

Market Risk: The study's methodology: Economic considerations can significantly impact market circumstances, renting demand, and property values. Local job rates, demographic changes, and economic downturns may empty properties and lower rental income.

Risk-reduction strategies: Regular market evaluations every six months allow real-time changes to rental price plans and marketing initiatives. Maintaining local economic data and trends helps you anticipate demand changes (Li, 2020).

Operational Risk: The study process: Unplanned maintenance issues could raise the final cost. Tenant damage or infrastructure failure may increase costs.

Risk-reduction strategies: Start a maintenance fund: Set aside some of your rental money for unexpected repairs to reduce maintenance expenditures.

Exit Strategy

Improvements and fixes: The analysis: Making the property more desirable to tenants and letting the owner charge higher rents can boost its resale value and rental income.

Action Plan: Specific Update Comments: Focus on the kitchen and bathroom, which are utilized most. Updates to these rooms might make the house more appealing to purchasers. Consider energy-saving upgrades to cut costs and attract green renters.

Home Improvement Cost Estimate: Set a repair budget to ensure that the investment yields the desired benefits. Based on local market data, prioritize renovation projects by ROI.

References

Berry, C. R. (2021). Reassessing the property tax.  Available at SSRN 3800536.

Hazen, G., & Magni, C. A. (2021). Average internal rate of return for risky projects.  The Engineering Economist,  66(2), 90-120.

Li, X. J. (2020). Research on investment risk influence factors of prefabricated building projects.  Journal of Civil Engineering and Management,  26(7), 599-613.