# ANSWER THE Q

**Paper, Order, or Assignment Requirements**

1-Consider the “buy vs. rent” Excel spreadsheet provided to you in

tab Q1.

a.

According to the assumptions m

ade in that spreadsheet should the average

individual

buy or rent? Brie

fly explain in 1 sentence.

b.

Alter the “buy vs. re

nt” Excel spreadsheet so that it

shows the

minimum rate

of price appreciation the homeowner must receive in order to be better off

buying than renting

.

Highlight in y

ellow the cell that includes this price

ap

preciation rate

2-Consider the levered DCF model provided to you in tab Q2 of the

Excel spreadsheet.

a.

Calculate the maximum price that an investors with the assumptions made in

the model should be willing to pay for that property.

Show

this

maximum

price in cell C2.

b.

If you expect a ge

neral increase in the risk premium for real estate

investments

over

the next 8 years, how would this

affect the expected levered

return on this prop

erty? Explain in 2

–

3 sentences and include your explanation

in t

he yellow box of tab Q2

3-sing the headers in tab Q3

of the Excel spreadsheet

and the

input values included in the green “box”

:

a.

Create a monthly

amortization schedule for a fixed rate 15

–

year mortgage.

Make sure that any value that the

user (me in this case) changes in the green

“box” will be reflected in your amortization schedule.

Your monthly payment

calculation should be included in cell J5 and should also change with any

changes to the values in the green “box”

b.

Next to the amortiz

ation schedule

,

create an Excel graph that shows the

remaining mortgage balance overtime. Make sure that your graph is labeled

appropriately.

c.

Include a vlookup function

in cell L7

that will reflect the remaining mortgage

balance associated with the end of

the month ent

ered by the user into cell J7

.

For example, if t

he user enters 34

into cell J7, cell L7

will

automatically

show

the remaining mortgage balance after 34 months.

4-Calculate the

nominal and real

annual

rate of

housing price

app

re

ciation

rate

for Las Vegas and for Houston

for the requested

different time

periods using the housing price index data

and the inflation index data

provided to

you in tab

Q4 of the

Excel

spreadsheet

.

In total

,

you need to

calculate 16

values

that will ap

pear in the

16

yellow cells of that Excel tab

5-Given your results from the previous problem:

a.

What can you say about the magnitude and the volatility of housing price

appreciation in the short, medium and long run?

b.

Are the results from

q

uestion 4

consistent with the theory of price appreciation

we discussed in the beginning of this course?

Briefly explain

6- Consider a REIT that holds high

quality

office buildings in some

of the best locations in the US. The REIT is current

ly traded at a price of

$

64

/share and there are

7

0

million shares outstanding. Using the information

below answer the following questions:

Expec

ted next year total revenue: $58

0M

Expected next year total expenses (including interest and depreciati

on): $32

0M

Expected next year depreciation: $80M

Expected next year interest:

$

60M

Total debt:

$2

.0

B

C

urrent office CAP in the US: 4.5% to 5.5

% depending on quality and location.

a.

What is your estimation for a fair market value for a share of the REIT

described?

Show your work!

b.

What is your estimation for a fair price to pay for the REIT described

,

if you

require

a

n

8.5

%

rate of

return on an unlevered basis and expect the REIT to

increase NOI at an average rate of 2%?

Should you buy shares of that REIT?

Show your

work!

7- PLAM and ARM:

a.

What

is the main difference between a PLAM and an ARM?

Briefly explain.

b.

Under which

economic

circumstances a PLAM type loan is greatly needed?

Briefly explain.

8- For each of the factors listed belo

w indicate whether the factor

,

independently,

is likely to increase or decrease the CAP rate on a particular

income producing property compared with an average property. For this question,

no explanation is needed

. I

ndicating increase or decrease for

facto

rs a through g is

sufficient.

a.

Lower

volatility in rent prices and occupancy rates.

b.

Worse

location

c.

High

inflation environment

d.

High risk premium environment

e.

High expected NOI growth

f.

Lower construction quality

g.

High quality tenants

9- Consider

an income producing property that according to your

assumptions and e

stimations is currently worth $4

M

on an unlevered basis when

a

n

8.5

% required rate of return is applied. One of the assumptions that you have

made when arriving at that estimate is that y

ou will sell the pr

operty in 6 years for

a CAP of 8%, which translates to $4.8

M at that future point in time.

a.

At what price will you sell the property in 6 years if all your assumptions

materialized except that you will s

ell the property for a CAP of 9% in

stead of

8

%?

Show your calculations.

b.

All other things equal, by how much the situation described in part a affects

the

current

value of the property. Show your calculations

10- According to the Truth

–

in

–

Lending

–

Act

(TILA)

lenders must

provi

de borrowers with an APR

in addition to

the interest rate to be charged on

the loan.

a.

What is the

purpose

of providing borrowers with an APR? Briefly explain.

b.

What is the main problem with APR? Briefly explain.

c.

Consider a potential borrower who evaluates tw

o mortgages options. One with

higher upfront fees and the other with lower upfront fees, but the two options

have

the same APR. Which option would you advise the borrower to take if

the borrower expects to stay in the home for a relatively short time perio

d?

Briefly explain

11- Real estate market inefficiency:

a.

Briefly describe 5 factors that cause the

stock market to be more efficient than

the

real estate market

.

b.

Can investors make money in an efficient market?

c.

Do educated and informed inve

stors rather operate in an efficient or

inefficient market?

Briefly

Explain

12-DCR

:

a.

Calculate the DCR for an income producing property

to be acquired at a price

of $8

M and a CAP of 6

%. The do

wn payment on the property is 3

0% of the

prop

erty value

and the mortgage on the remaining balance is a fixed

–

rate

i

nterest only loan at a rate of 4

%.

b.

What is the meaning of a DCR of 1.30, for example? Please explain.

c.

List and briefly explain

three different factors that are likely to cause the

lender

to

require a

high

er DCR?

13- Cash

–

on

–

cash yield and positive vs. negative leverage:

a.

Calculate cash

–

on

–

cash yield on the property described in the previous

question. Show your calculations.

b.

All other things equal, what is the “turning point”

interest rate

at which

the

property described in the previous question will no longer generate a positive

leverage? In other words, what is the interest rate that any rate above that rate

will yield a negative leverage?

Show your work

14- Fo

ur

years ago

, when you were 24,

you graduated from college

and landed a good paying job. At that time you purchased your

“

st

arter home” for

$16

0K. Since then

,

the housing market in the city where your home

is located

experienced unusually high rate of pric

e appreciation and a local real estate agent

informed you that if you were to put your home on the market today

,

you will

be

able to sell it for about $28

0K.

a.

Did the recent abnormal housing price appreciation benefited you? Explain in

3

–

4 sentences.

b.

What k

ind of individuals benefited the most from the recent price appreciation

described in this question

? Explain in 2

–

3 sentences.

c.

What kind of individuals suffered the most from the recent price appreciation

described in this question

? Explain in 2

–

3 sentence

s

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