Question

Market says that comparable homes in good condition sell for $160,000. You have examined the home and believe that it will need extensive work to make the kitchen and bathrooms current. It needs a new roof and other typical work. That often includes cleaning, painting, and flooring. You estimate that you will spend 3 months and $45,000 on the house, doing some work yourself. Your investment goals for real estate are a minimum of 18% of sales price as profit. You will use a real estate agent that charges 5% commission. Assume that this is your only closing cost. You will be using cash.

1. What is the most that you should pay for the house?

2. If you rent the house you would take out a loan at 5% for 20 years. You will borrow at 75% loan to market value. How much rent would you have to charge to break even each month to cover your mortgage payment plus $200 per month in expenses?

Answer 1

1) the Most that could be paid for the house to get 18% profit on sal price of $160,000 is $78,200

2)   amount of rent to break even would be $991.95

If rented out                                     

Loan amount is 75% of market value                                     

Loan amount   =       120000 ( 160000 X 75%)                                       

                                No. Of Payments (n)      240   (   20 years X 12)

                                interest rate   (i)               0.41667% per month ( 5% / 12)

                               

                                Loan amount (PV)          $120,000.00

                                for the above parameter- we find the PMT which will be our monthly mortgage payments,

the excel formula

amount of rent to break even would be = Monthly mortgage + Monthly expense

                                                                = 791.95     +   200

                                                               = $991.95