THE MORTGAGE FOR THE PURCHASE OF AN APARTMENT AND THE IRR OF THE

INVESTMENT OVER A 20 YEARS RENTAL

I have to buy an apartment, and my selection is for an apartment located downtown

Rome, 150 sqmt, worth 600.000 €.

I can afford a yearly rate of a mortgage not greater than 25.000.

1. DETERMINATION OF THE ADVANCE PAYMENT

If the fixed yearly interest rate is equal to 3 %, and the tenor of the mortgage
is 20 years, which is the advance payment that I must afford, assuming no
additional cost impact (fiscal, technical or whatsoever) ?

2. IRR OF THE INVESTMENT

 If I rent the apartment for 20 years (the same duration as the mortgage)
, at a rate of 15 €/ sqmt per month
 If the rate is revised every 4 years, and is increased by 10 %
 If at the end of the 20 yers rental the market value of the apartment is
900.000 € .
Then, which is the IRR of my investment ?
 1 DETERMINATION OF THE ADVANCE PAYMENT

The Discounted Value of my 20 years’ mortgage is :

(1+i)n - 1
L0 = R x ---------------
(1+i)n x i

where :
L0 è is the Discounted Value
R is the Yearly Rate
i is the Interest Rate
n is the tenor

If we calculate the above formula, we find :

L0 = 371.937 €

And therefore the Advance Payment due is :

600.0 – 371.937 = 228.063 €

 2. IRR OF THE INVESTMENT

Let’s state our 20 years “Cash Flows” table, and let’s populate the table with the
Inflows and Outflows year by year :

Years 0 1 2 20

OUTFLOWS : Advance -228 0 0 0

Mortgage 0 -25 -25 -25

INFLOWS : Rental 0 2,25 2,25 …..

Terminal Value 600

CASH FLOW -228 -22,75 -22,75 ----

DISCOUNTED C.F.

NPV

IRR