You currently live at Boardwalk and are considering taking a mortgage out on your property to pay off several rental properties that you own. The bank has approved you for a 12 year loan at 2.79% and up to $150,000 borrowed. Your goal would be to pay off 4 of your rentals. You currently have the following rental properties in your portfolio: 1. St Charles Place: 6.125% interest, 30 year, original loan amount 50,000. You just made payment #109 2. Marvin Gardens: 5.75% interest, 30 year, original loan amount 47,000. You just made payment # 110 3. Tennesse Ave: 4.375% interest, 10 year, original loan amount 42,000. You just made payment #58 4. States Ave: 5.875% interest, 15 year, original loan amount 54,000. You just made payment #72 5. Virgina Ave: 6.875% interest, 30 year, original loan amount 44,000. You just made payment #96 6. St. James: 4.46% interest, 10 year, original loan amount 50,000. You just made payment #44 As a business owner you want to review your options and see which one makes the most sense.
1. Which combination of properties will result in the most amount of interest saved over the course of the loan?
2. Which combination of properties will result in the most benefit in cash flow today?
3. If as the owner you would like to find a balance between cash flow and interest saved; then which combination of properties would you recommend paying off? (show all work)
should use excel to create an amortization table . Use the payment (PMT) solver in excel to calculate payment.
The bank has approved you for a 12 year loan at 2.79% and up to $150,000 borrowed. | |||||
Interest in this loan = 150000*2.79% | 4185 | ||||
Rental Properties | Loan amount | Tenure of loan | Interest % | Interest p.a | |
St Charles Place | 50000 | 30 | 6.13% | 3062.5 | |
Marvin Gardens | 47000 | 30 | 5.75% | 2702.5 | |
Tennesse Ave | 42000 | 10 | 4.38% | 1837.5 | |
States Ave | 54000 | 15 | 5.88% | 3172.5 | |
Virgina Ave | 44000 | 30 | 6.88% | 3025 | |
St. James | 50000 | 10 | 4.46% | 2230 | |
Total Interest | 16030 | ||||
1 | Here interest rate for Virgina Ave, St Charles Place & States Ave are higher. | ||||
So we need to pay them first to get the higher interest savings. | |||||
Interest rate | Interest savings | ||||
Amount of loan taken | 150000 | ||||
Less paid for Viggina Ave | -44000 | 6.88% | 3025 | ||
Less paid for St Charles Place | -50000 | 6.13% | 3062.5 | ||
Less paid for States Ave | -54000 | 5.88% | 3172.5 | ||
Balance remaining | 2000 | ||||
Less paid for Marvin Gardens | -2000 | 5.75% | 115 | ||
Balance remaining | 0 | ||||
Total Interest saved | 9375 | ||||
Less Int paid on loan | -4185 | ||||
Net Interest saved | 5190 | ||||
2 | Most benefit in cashflow today | ||||
So here we need to pay first to whom whose tenure of loan is lower | |||||
Accordingly | |||||
Interest rate | Interest savings | ||||
Amount of loan taken | 150000 | ||||
Less paid for St James | -50000 | 4.46% | 2230 | ||
Less paid for Tennesse Ave | -42000 | 4.38% | 1837.5 | ||
Less paid for States Ave | -54000 | 5.88% | 3172.5 | ||
Balance remaining | 4000 | ||||
Less paid for Virginia Ave | -4000 | 6.88% | 275 | ||
Balance remaining | 0 | ||||
Total Interest saved | 7515 | ||||
Less Int paid on loan | -4185 | ||||
Net Interest saved | 3330 | ||||
3. If owner choose both the combination, then he should first pay the loan with lower tenure & loan with higher interest to meet the requirment of owner. So it is beeter for the owner to pay St James 1st, & then Virginia Ave & St charles place to get the higher saving in interest as these both properties have higher rate of interest.
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