Question

answer q4 only

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? 4. For problem 3, assume you sell the property after 5 years, 15 years, or 30 years for $350,000. How does that change your rate of return? How does this change your decision in regard to this opportunity?

Answer 1

4). Total return = (Gain/cost) - 1

Selling after 5 years: Gain = selling price + (monthly net income*number of months)

= 350,000 + (2,400*5*12) = 494,000

Total return = (494,000/300,000) -1 = 0.6467

Annual return = [(1+0.6467)^(1/5)] -1 = 10.49%

Selling after 15 years: Gain = selling price + (monthly net income*number of months)

= 350,000 + (2,400*5*180) = 782,000

Total return = (782,000/300,000) -1 = 1.6067

Annual return = [(1+1.6067)^(1/15)] -1 = 6.60%

Selling after 30 years: Gain = selling price + (monthly net income*number of months)

= 350,000 + (2,400*5*360) = 1,214,000

Total return = (1,214,000/300,000) -1 = 3.0467

Annual return = [(1+3.0467)^(1/30)] -1 = 4.77%