Help with question

[guess55]

Hello everyone i would appreciate if anyone could help me with this question?

Benny requires a 12% before-tax return on his real estate investments. If he invests
$78,000 cash to buy a rental townhome that has $120 per month cost (in taxes, insurance
and maintenance), and if he can sell the property in 5 years for $88,000, how much
monthly rent must he charge to reach her target rate of return?

 

[lumpyme]

simple maths right?
78k original cost plus per month cost over 5 years is 7.2k. total cost is 85.2k
sale price of the house is 88k, profit is 2.8k

if he wants a 12% return on his investment of 78k, he needs to have a profit of 9.36k
total profits from rent must be 6.56k

divided by 5 is 1.312k a year which makes a monthly rental of $110

 

[guess55]

simple maths right?
78k original cost plus per month cost over 5 years is 7.2k. total cost is 85.2k
sale price of the house is 88k, profit is 2.8k

if he wants a 12% return on his investment of 78k, he needs to have a profit of 9.36k
total profits from rent must be 6.56k

divided by 5 is 1.312k a year which makes a monthly rental of $110

but using this method, it does not take into account the time value of money right?

 

[lumpyme]

my assumption is that time value of money is already factored in your 12% returns.
how did you get the figure of 12% is the question here

 

[guess55]

it was just given in the question and not calculated by me

 

[Gerrard]

I think TS is taking a finance course at Coursera.
And this is one of the questions in the weekly assignment.

 

[guess55]

I think TS is taking a finance course at Coursera.
And this is one of the questions in the weekly assignment.

Do you know how to solve this question?

 

[sandwich]

Trick questions. He becomes a her at the end

 

[sacredrays]

but using this method, it does not take into account the time value of money right?

time value of money, they should give an annual interest rate or smth I think. The 12% before tax return also never state if it's annually or at the end of 5 years (we assume it's 5 years as he "plans" to sell of at $88,000 after 5 years).

Lots of assumptions here. Btw, I'm not a finance person. lol

 

[cmanz81]

This is a trick qs. He is unable to rent out as he hasnt met his 5 yr mop

 

[1nd3x1nv3stor]

Hello everyone i would appreciate if anyone could help me with this question?

Benny requires a 12% before-tax return on his real estate investments. If he invests
$78,000 cash to buy a rental townhome that has $120 per month cost (in taxes, insurance
and maintenance), and if he can sell the property in 5 years for $88,000, how much
monthly rent must he charge to reach her target rate of return?

You could annualize the cash flow with rate of 12%.
In Flow = Out Flow
Sale + Rent = Investment
$88,000 (A/F,12%,5) + Rent = 78,000 (A/P,12%,5)
$88,000 (0.1574) + Rent = 78,000 (0.2774)

Solve this equation gives you Rent = $7,786 per year, or $649 per month.
Add $120 cost will give you monthly rent of $769.

Hope it helps.

 

[simon_84]

I'm not sure if correct a not...based on simple understanding, need to use financial calculator.

n=5
I/yr=12
Pv=-78 000
Fv=88 000
Solve for pmt=7785.90

 

[salesgp]

$88,000 is just a distraction.