# Real Estate Finance Study Set 1

## Quiz 7 :Single Family Housing: Pricing, Investment, and Tax Considerations

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List four important drivers of housing demand and price appreciation.
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Demand of housing
Demand of housing and price appreciation of housing depends upon various factors. When the demand of housing increases the price of housing is also increasing. Various factors on which the price of housing depends are mention below:
1. Individual earning and employment
When earning of the individual and employment in the economy increases the demand of housing is also increasing. If demand of housing increases the price of housing is also increasing in similar manner.
2. Demographic population
If the demographic population is young in economy then there is high chance that demand of housing will increase. If demand of housing increases the price of housing is also increasing in similar manner.
3. Interest rate
If interest rate decreeing then there is high chance that demand of housing will increase because the EMI on home loan became cheaper after decreasing the interest rate. If demand of housing increases the price of housing is also increasing in similar manner.
4. Infrastructure development
If government is planning some infrastructure development in particular area like highways, airport or any other public service the demand of housing in that area is increasing. If demand of housing increases the price of housing is also increasing in similar manner.

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What are the capital gains rules as applied to residential property owners
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Introduction:
The appraiser can estimate the value of property with the help of sales comparison approach, cost approach, and income approach. Any of the three methods can be used for the valuation of the property. However, each method has advantages and disadvantages.
Capital gain rules applicable to residential property owners:
The capital gain rules applicable to the residential property owners are as follows:
• All the residential property will be considered as capital asset.
• The difference between the selling price and the purchase price will be treated as capital gain.
• The capital gain will be liable to capital gain tax.
• The capital losses on the investment property will be allowed for deduction from the capital gain from the other property. However, the loss on property held for personal use will not be allowed for deduction from capital gain.
• The capital gain can arise from the short term capital asset or long term capital asset. The short term capital asset is an asset held for less than one year. The residential property held for more than one year will be treated as long term capital asset.
• The capital gain or losses are shown in Schedule D (line 13) of form 1040.

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What are public goods How may they be reflected in house prices
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Introduction:
Public goods refer to the goods used by the public at large of the economy. Public goods are non excludable and non rivalrous goods. The public goods are basic societal goods and demanded at large by the public. The common examples of public goods are parks, sewer systems, water, and defense.
Effect of public goods in price appreciation of house property:
The housing demand and price appreciation are affected by several factors:
1. Population growth : The growth in the population in the region will increase the demand of the residential property. The increase in the demand will increase the price of the property.
2. Employment : The increase in the employment level increases the availability of money supply in the economy. The increase in the money supply will increase the demand of residential property. Hence, the increase in the employment level will increase the demand and consequently the price appreciation in the housing property.
3. Interest rate : The increase in the interest rate will decline in the demand of the housing loan. The decline in the demand of the housing loan will lower down the sale and demand of hosing property. The decline in the demand will lower down the price of house.
4. Federal income tax : The increase in federal tax decreases the amount of take home pay. The decline in the take home pay will not motivate the investors to invest in housing property. The decrease in demand in housing property will lower down the price of the house.
Besides these, the public goods will increase the benefits available to the buyer of house property. The increase in the public benefits will increase the demand of property by the buyers. The increase in the demand will appreciate the price of house. Therefore, public goods will appreciate the price of houses.

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You are considering an option to purchase or rent a single residential property. You can rent it for $2,000 per month and the owner would be responsible for maintenance, property insurance, and property taxes. Alternatively, you can purchase this property for$200,000 and finance it with an 80 percent mortgage loan at 6 percent interest that will fully amortize over a 30-year period. The loan can be prepaid at any time with no penalty. You have done research in the market area and found that (1) properties have historically appreciated at an annual rate of 3 percent per year, and rents on similar properties have also increased at 3 percent annually; (2) maintenance and insurance are currently $1,500.00 each per year and they have been increasing at a rate of 3 percent per year; (3) you are in a 26 percent marginal tax rate and plan to occupy the property as your principal residence for at least four years; (4) the capital gains exclusion would apply when you sell the property; (5) selling costs would be 7 percent in the year of sale; and (6) property taxes have generally been about 2 percent of property value each year. Based on this information you must decide: a. In order to earn a 10% IRR after taxes on your equity, should you buy the property or rent it for a four-year period of ownership b. What if your expected period of ownership was to change to five years. Would owning or renting be better if you wanted to earn a 10% IRR after taxes c. Approximately what level of rents would make you indifferent between owning and renting for a four-year period Assume a 4.5% after-tax IRR would be the minimum you would need to earn on capital invested in the home. Essay Answer: Tags Choose question tag An investor is considering the acquisition of a "distressed property'' which is on Northlake Bank's REO list. The property is available for$200,000 and the investor estimates that he can borrow $160,000 at 8 percent interest and that the property will require the following total expenditures during the next year: a. The investor is wondering what such a property must sell for after one year in order to earn a 20 percent return ( IRR ) on equity. What other issues must he consider b. The lender now is concerned that if the property does not sell, he may have to carry the property for one additional year. He believes that he could rent it and realize net cash flow before debt service of$1,200 per month. However, he would have to make an additional $12,800 in interest payments on his loan during that time, and then sell. What would the price have to be at the end of year 2 in order to earn a 20 percent IRR on equity Essay Answer: Tags Choose question tag Spreadsheet Problem. Use the Ch7_Rent_vs_Own worksheet in the Excel workbook provided on the Web site. Determine the after-tax IRR for owning versus renting in each of the five years with the following changes in the original assumptions in the spreadsheet: a. The homeowner has a 15 percent marginal tax rate instead of 28 percent. b. Rents and property values will not increase over the five years. c. The loan amount is$105,000 instead of $120,000. d. The initial rent for year 1 is$15,000 instead of $12,000 Essay Answer: Tags Choose question tag Essay Answer: Tags Choose question tag You are considering the purchase of a property today for$300,000. You plan to finance it with an 80 percent loan. The appreciation rate on the property value is expected to be 4 percent annually for the next three years. A) Approximate the expected annual average rate of appreciation on home equity for the next 3 years. B) What if you now think that a $300,000 purchase price may be somewhat high and that if you pay this price, the expected appreciation rates in your house price will be as follows: year 1 = 0%, year 2 = 2%, and year 3 = 3%. How will your answer to part ( a ) change Essay Answer: Tags Choose question tag What are the differences between the cost and sales comparison approaches to appraising property Essay Answer: Tags Choose question tag Why is the income approach to value often difficult to use on a single family residential appraisal Essay Answer: Tags Choose question tag When considering an investment in "distressed" properties, what are the most important areas of research that should be undertaken Essay Answer: Tags Choose question tag You have an opportunity to acquire a property from First Capital Bank. The bank recently obtained the property from a borrower who defaulted on his loan. First Capital is offering the property for$200,000. If you buy the property, you believe that you will have to spend (1) $10,500 on various acquisition-related expenses and (2) an average of$2,000 per month during the next 12 months for repair costs, etc., in order to prepare it for sale. Because First Capital Bank would like to sell the property as soon as possible, it is willing to provide $180,000 in financing at 8 percent interest for 12 months payable monthly (interest only). Your market research indicates that after you repair the property, it may sell for about$225,000 at the end of one year. Furthermore, you will probably have to pay about \$3,000 in fees and selling expenses in order to sell the property at that time. If you wanted to earn a 20 percent return compounded monthly, do you believe that this would be a good investment If not, what counteroffer would you have to make First Capital in order to achieve the 20 percent return
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