You buy a rental property. Down payment is 10000. The mortgage payments are 800/

Question

You buy a rental property. Down payment is 10000. The mortgage payments are 800/ mth. You keep the house for two years. you sell the house for a 15000 profit. There are two renters in the home. They pay 550 /mth each for the first year and then 700 each for the second year. Maintenance cost is 0 for the first 6 months.

At the end of the seventh month the maintenace costs jump to 250 and increases by 25 every month after. If the interest rate is 12% compounded monthly what is the homes current worth

Explanation / Answer

The present value of home can be calculated by bring the value of all cash at ts present value. In other words present worth of house is the present value of all inflow including profit mius present value of all outflow. The montly interest rate is 12/12 =1%

25 is 10% of 250. Therefore maintenance jumps 10% every month.

The ratio of growth and interest rate = (1+r)/(1+g) = (1.001)/1.01 =0.991089

Annuity with growth present value = P(1-((1+r)/(1+g)-n) / (g-r)

g=0.10 , r =.001

Anuuity pv = P(1-(1+r)-n) / r

PW = 15000(1+.01)-24 + 550 x 2 x(1-1.01-12)/.01 + [700x 2 x(1-1.01-12) / .01 ] (1.01)-12 -[ 250/(.1-.01)](1-.991089-17) x 1.01-7 - 1000 -800(1-1.01-24)/.01

I have assumed that maintenance cost is paid by the owner.

PW = 11813.49 + 12380.58 + 13983.63 -425.815 -1000 -16994.71

PW= $19757.57

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