You want to purchase a $150,000 house with a 10% down payment and the remainder

Question

You want to purchase a $150,000 house with a 10% down payment and the remainder on a one-year, 5% loan. In one year, you sell the house for $162,000 and pay off the loan and its accrued interest. You are in the 25% marginal tax bracket.

Your net return (rounded to two decimal places as a percentage) on the investment is ____________ %

Feedback:From the sale price, you must subtract your loan amount, the interest on the loan, and your initial investment (equity); but also don't forget to add back your tax shield amount on the mortgage interest. Take this amount divided by your initial equity investment.

Explanation / Answer

Interest for the first year = (Purchase price - down payment ) * interest rate = (150000 - 15000) * 5% = $6750

Total expense on the purchase of house = Purchase price + interest expense = $150000 + $6750 = $156750

Profit on selling the house = $162000 - $156750 = $5250

Net profit after tax = $5250 - (5250 * 25%) = $3937.50

Net return on the investment is = $3937.50 / $150000 = 2.625%

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