Question

3. You invest in a rental property at $300,000. You estimate that the annual cost of maintaining the property is $600 a month and the rental revenue is $3,000 a month. What is the annual rate of return after 5 years, 15 years and 30 years? What would your decision be in regard to this opportunity?

Answer 1

Revenue Per Year = (3000*12) = $ 36,000

Cost Per Year = (600*12) = $ 7,200

Profit Per Year = $ 28,800

Rate of Return = (Total Net Profit /No.of years)/Initial Cost*100

= (1,44,000/5)/300000*100

= 9.6

Annual Rate of return after 5 years = (1+0.096)⁵ - 1

=5.48 - 1

= 4.48

Annual Rate of return after 15 years = (1+0.096)¹⁵ - 1

= (1.096)¹⁵ - 1

= 16.44 - 1

=15.44

Annual rate of return after 30 years = (1+0.096)³⁰ - 1

=(1.096)³⁰ - 1

= 32.88 - 1

= 32.87