You want to buy a house for which the owner is asking $625,000. The only problem is that the house is leased to someone else with five years remaining on the lease. However, you like the house and believe it will be a good investment. How much should you pay for the house today if you could strike a bargain with the owner under which she would continue receiving all rental payments until the end of the leasehold, at which time you would obtain title and possession of the property? You believe the property will be worth the same in five years as it is worth today and that this future value should be discounted at a 10 percent annual rate.
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