Alex is considering buying a house. He is planning to rent the house and sell it

Question

Alex is considering buying a house. He is planning to rent the house and sell it after few years to buy a bigger house. His current plan is to sell the house after 5 years. The house worth $255,000 today. He can get $255,000 mortgage for 9% nominal annual interest rate, compounded monthly. Based on the information he collected, the house can be sold for 385,000 in 5 years. The monthly maintenance fee is $200. How much should he charge the tenants (monthly) in rent to cover the maintenance fee and the mortgage? Excel solution is NOT accepted. .....................

Explanation / Answer

ANSWER:

Present value of house = $255,000

i = 9% yearly or 9% / 12 monthly = 0.75% monthly

n = 5 years or 60 months

mortgage fee = present value of house(a/p,i,n)

mortgage fee = 255,000(a/p,0.75%,60)

mortgage fee = 255,000 * 0.0208

mortgage fee = $5,304

maintenance fee = $200

so monthly rent that alex needs to charge = mortgage fee + maintenance fee = $5,304 + $200 = $5,504

so he needs to charge $5,504 from the tenant in order to cover the mortgage and maintenance fee.

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