Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

You are considering an option to purchase or rent a single residential property. You can rent it for $2,000 per month and the owner would

You are considering an option to purchase or rent a single residential property. You can rent it for $2,000 per month and the owner would be responsible for maintenance, property insurance, and property taxes. Alternatively, you can purchase this property for $200,000 and finance it with an 80 percent mortgage loan at 6 percent interest that will fully amortize over a 30-year period. The loan can be prepaid at any time with no penalty.

You have done research in the market area and found that (1) properties have historically appreciated at an annual rate of 3 percent per year, and rents on similar properties have also increased at 3 percent annually; (2) maintenance and insurance are currently $1,500.00 each per year and they have been increasing at a rate of 3 percent per year; (3) you are in a 26 percent marginal tax rate and plan to occupy the property as your principal residence for at least four years; (4) the capital gains exclusion would apply when you sell the property; (5) selling costs would be 7 percent in the year of sale; and (6) property taxes have generally been about 2 percent of property value each year.

a.Based on this information, what are the end-of-year net cash flows of owning the property?

Year 1 Year 2 Year 3 Year 4

c.Approximately, what level of rents would make youindifferentbetween owning and renting for a four-year period? Assume that a 4.5 percent after-taxIRRwould be the minimum you would need to earn on capital invested in the home.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Healthcare Finance: An Introduction To Accounting And Financial Management

Authors: Louis Gapenski

6th Edition

1567937411, 978-1567937411

More Books

Students also viewed these Finance questions

Question

can you do trend analysis for dec 2019 of ITC

Answered: 1 week ago

Question

workout program for someone who hasnt trained in a couple months

Answered: 1 week ago