Question

Case 2

Victor and Maria Consider Selling Maria’s Mother’s Home

Victor and Maria Hernandez are thinking about selling her mother’s home, which she recently inherited, and use the proceeds to enhance their investments for retirement. Its price declined about $30,000 in recent years to today’s value of $170,000. The home is fully paid for.

1. If the rent is $1000 a month, what is the rental yield?
   
2. If they sold the home, should they invest the proceeds into any alternative investments, such as gold?

Answer 1

Value of the home in today's term = 170000

Rent per month = 1000

Rent for a year = 1000 * 12 = 12000

Rental yield is calculated by dividing the total annual rent by the value of the property today

Rental yield = Annual rent / Home value

Rental yield = 12000 / 170000

Rental yield = 0.070588

Rental yield = 7.059%

b) Considering the current economic scenario and inflation outlook, it does not make sense to invest in gold. The reason is that gold provides healthy returns in times of recession or high inflation. When there is a recession, investors seek to protect their wealth by investing in hard asset like gold and precious metals. Gold also serves as a store of value and a real hard currency as compared to fiat money. Also, when there is high inflation, gold tends to outperform other asset classes since gold is a hedge against inflation. However, inflation in the United States remains subdued and the Federal Reserve projects inflation to remain muted in the coming 2-3 years. At the same time, the Federal Reserve expects economic growth of around 2% for the next 2-3 years. Therefore, the United States is likely to have stable growth and muted inflation. In such a scenario, gold tends to under perform. Hence, it does not make sense to invest in gold as an asset class.