Maggie Mae bought a two unit town house on Lime Street for $500,000 to use as a

ID: 2459093 • Letter: M

Question

Maggie Mae bought a two unit town house on Lime Street for $500,000 to use as a rental property for vacationers.She made a $50,000 down payment.Maggie's annual expenses on the house are mortgage interest of $20,499.53,depreciation of 2.5%of the purchase price,taxes of $6,000,and other miscellaneous costs,such as repairs,of $5,000.Assuming Maggie is able to keep each of her units rented out all 12 months of the year,what should she rent each unit for if she hopes to earn a 12% annual yield?
Maggie Mae bought a two unit town house on Lime Street for $500,000 to use as a rental property for vacationers.She made a $50,000 down payment.Maggie's annual expenses on the house are mortgage interest of $20,499.53,depreciation of 2.5%of the purchase price,taxes of $6,000,and other miscellaneous costs,such as repairs,of $5,000.Assuming Maggie is able to keep each of her units rented out all 12 months of the year,what should she rent each unit for if she hopes to earn a 12% annual yield?

Explanation / Answer

Answer

Figures in $

Particulars

Amount

Annual Expense on house

Mortgage interest

20499.53

Depreciation

12500

(2.5% of purchase price i.e. 500000)

taxes

6000

Other Miscellaneous costs (Repairs)

5000

Total annual expense on the house (a+b+c+d)

43999.53

Purchase price of town house

500000

Expected annual yield (%)

0.12

Expected Annual yield (amount) (f*g)

60000

Annual expected rent to be charged (e+h)

103999.53

Number of unit town house

Rent to be charged from each of units (i/j)

51999.765

Answer : Rent to be charged from each of unit of house is $ 51999.765 to earn a 12% annual yield.

(Answer may change if you consider depreciation as non cash item and decide to exclude it from annual expense).