I got this problem about break even analysis which I'm not sure if my understanding to the problem is right. Anybody who could tell and explain how to solve this kind of problem.
I really appreciate your help. Thanks
An apartment house consisting of ten independent units was built at a cost of 20,000(dollar) per unit. The lot on which it was built was bought at a cost of 60,000. The investment in the apartment house is expected to be recovered in 10 years. From similar houses built, it was found that the average maintenance cost per year was 2,000 for the 10 units. Insurance on the building is 3% of the first cost and real estate taxes on the building and lot is 3.5% annually on the total assessed valuation of 120,000. Income tax on the rental amounts to 10% on the gross revenue. The lot is expected not to decrease in value.
If money is worth 12% to the owner and the average occupancy is 90% determine the average monthly rental for each unit so that income and expenses will break even.
At what time do you want to break-even? Do you want to break-even at year 10 or on a monthly basis?
Looks like this guy has $260,000 and wants to get 12% annually on it
(that's $31,200 each year), can't get this anywhere, so decides to try
by becoming a landlord...right?
So the "stuff" you gave us has to be manipulated such that a certain
total cash rent per year pays ALL expenses and leave a net afer-tax
revenue of $31,200 each year...right?
Plus we can treat EVERYTHING as annual flows, including the total
rents; like, no need to complicate by using monthly compounding...
Hmmm...what d'you think, Jass?
So, as a quick "look" (the maintenance + insurance + r.e.taxes = ~12,000):
Solving for x: x = $48,000
Annual rent : x
Expenses : 12000
Before taxes : x - 12000
Income taxes : .10x
Net revenue : x - .10x - 12000 = 31200
That's 90% of "actual", so 48000/.9 = 53333 = rental amounts,
of which 90% will be received...
I think this is the right idea, but the question is about breaking even, so my understanding is that he just wants to be able to pay back his 260,000 at the end of ten years and have enough to pay off all of his annual expenses each year. Then the 12% is just used as the discount rate for all of the incremental cash flows.
Originally Posted by Wilmer
I am just not sure that the question is stated specifically enough to be sure which method is correct.
Then, we can look at it as if he borrowed the $260,000 (12%, 10 annual payments of ~$46,000),
meaning x - .10x - 58000 = 0 : 46000+12000 = 58000
x = 64,444 ; so 64444/.9 = ~71600 ....or $7,160 per unit (about $600 per month)...