IE 305 Final Project Report

Team Members:
Sarah Baratta
Cody Juracek

Submitted on:
May 2, 2019
Executive Summary:
Our team is wanting to buy a duplex in which we live on one half and we rent out the other half. We want
to determine what would be the best way to pay for the duplex by taking out a 5-1 ARM 15-year loan, 30-
year fixed loan, or if continue renting the apartment that we already live at.

The first option considered was renting the apartment, which results in a simpler cash flow because is no
additional revenue from rent, not house taxes or selling fees, no casualty fees, no depreciation, and so on.
Thus, the only factors to consider are the income, CD interest, and rent costs. Using the net cash flow and
the CD rate as the MARR rate to determine net present worth (NPW) over the four years, it is found that
the net profit is $51,836.

Next, we found a nice duplex to live at - which is attached below - and determined its purchase price, then
determined the property’s taxable income through the Story County Assessor Site. Then it is just a matter
of what kind of loan to use: the 15-year ARM or the 30-year Fixed Rate. The other two options factor in
several more variables than renting the apartment such as depreciation, casualty insures, Story county
taxes, and so on. The benefit of these two options is that there is additional revenue from renting out the
other half of the duplex. That half also depreciates which can be added to the net cash flow. Also, the
house appreciates every year so it can be sold for more than it was bought for. However, there are also
additional costs to pay such as a monthly mortgage payment and taxes. How we factored in these
variables for each loan is explained below:

Starting with the 15-year ARM, we calculated our revenue (ex: pre-tax income, rent from a tenant, CD),
taxable expenses (ex: taxes, mortgages, etc.), taxable income, then summed everything up to equal our net
income. We did the same thing for our net cash flow, found our operating activities (ex: selling the house,
depreciation, etc.), non-taxable expenses (ex: casualty expenses), and investments. After 5 years of
paying the loan, we had to change the interest APR of the loan from 3.75% to 5.0%. From there we
needed to calculate the total present value(s) in year 4 to determine the mortgage payment. Then we
calculated the final NPW by using all the net cash flows with the interest rate of 0.5% which ended
equaling to $129,244.66 as our NPW.

The 30-year Fixed-Rate loan was very similar to the same property; However, a fixed interest rate was
used for the loan, which made the year 4 mortgage payment easier to calculate. Performing all the same
cash flow calculations as the previous option, it was found that the NPW with a 0.5% interest rate ended
up as $119,432.39.

After evaluating each option, the option our team determined would be the best is to purchase the house
for four years with the 5-1 ARM 15-year loan. This is because the net present worth of this option is
better than the other two options and would result in the most profit at the end of the four years.
Team Members Contributions:
Sarah - Researched the equations needed for a mortgage payment for all months, including the last month
with the remaining loan balance factored in. Also, calculated depreciation using the CD bond interest
return along with the depreciation residential rate and half-month convention using the specific months
noted in the spreadsheet.

Cody - Researched and compared different CDs and loan rates from different banks. Found a duplex to
purchase and determined the land and building values along with the corresponding Story County Taxes.
Calculated the revenue values and the overall cash flows.

Together, we formatted the tables for all 4 sheets of the spreadsheet that was provided as a template and
wrote the report together once the spreadsheet was completed.
Duplex Documentation:
This property was found from Trulia, from the following link:
https://www.trulia.com/p/ia/ames/2614-melrose-ave-ames-ia-50010--2052868550
Story County Assessor Site of the Duplex:
This was retrieved from:
https://beacon.schneidercorp.com/Application.aspx?
AppID=165&LayerID=2145&PageTypeID=4&PageID=1108&Q=356146850&KeyValue=0534225090
CD Documentation:
The CD used is from a U.S. bank which is a rate of 0.5% for a 4 year (48 months) period for a deposit of
$50,000.

Retrieved from this link: https://www.usbank.com/ICWeb/productComparison.html?productCode=CDA

Zipcode used: 50010
5-1 ARM Loan Documentation:
The Bank of America 5/1 ARM loan rate was used, which was an estimated 3.75% up until year 5, and
which it would be 5% for the remainder of years. There was no set length for the full loan. Rather, it is
flexible and can be applied to 15-year or a different period.

This was retrieved from: https://www.bankofamerica.com/mortgage/assumptions-home-loan/?

purchasePrice=250000&downPayment=50000&zipcode=95464&loanType=mortgage#product555
FRM Loan Documentation:
The FRM loan that was used in our calculations is from U.S. Bank. The 30-year rate of 4.323% was used.

This was retrieved from: https://www.usbank.com/home-loans/mortgage/mortgage-rates.html