Question

A person bought a house for $350,000 with closing fees of $1,000. Three years later, the house was sold for $472,000 with $1,200 in closing fees and a real estate broker’s fee of 3% of the selling price. What average annual rate of return was realized on the investment?

Answer 1

Answer:

Given data:-

A person bought a house for the amount = $350,000

   with closing fees = $1,000

   Number of years of time = 3 years

house was sold for the amount = $ 472,000

With closing fees = $1,200

    real estate broker’s fee is = 3% of the selling price

Now, we have to find :-

What average annual rate of return was realized on the investment (r) :-

We already know, the formula for the average annual rate of return is,

Average annual rate of return, r = (Ending value of investment / beginning value )^(1/ no.of years) -1

The value of the Ending value of investment = ( house was sold for the amount - (3% of the selling price) - With closing fees for selling )

= ( $ 472,000 - (0.03)( $ 472,000) - $,1200 )

= $ 4,56,640

  Ending value of investment = $ 4,56,640

The value of the begging value of investment =( A person bought a house for the amount + With closing fees for selling )

=   $350,000 + $1,000

= $ 3,60,000

Begging value of investment = $ 3,60,000

Now, Average annual rate of return = ( ( $ 4,56,640 / $ 3,60,000 ) ^ (1/3) ) -1

= ( ( 1.26844) ^ ( 0.333) ) - 1

=1.082402 -1

= 0.08240

    Average annual rate of return, r = 0.08240 * 100%

= 8.240 % per year

Average annual rate of return was realized on the investment, r = 8.240 %