You are deciding between two different investments over the next 5 years. The fi
ID: 2821157 • Letter: Y
Question
You are deciding between two different investments over the next 5 years. The first option is to buy a duplex that costs $265,000, where each unit rents for $550 a month. You estimate your annual expenses will be about 5% of your gross revenue and that the price will appreciate by 2% per year. Alternatively, you can invest in a REIT that has a dividend yield of 3.5% and is expected to appreciate at 3% per year. Which of these two options do you prefer? Why? (Please use financial calculator BAII)
Explanation / Answer
Buy a duplex house
total revenue for 5 years
550*2*60
66000
less total expenses
66000*5%
3300
net revenue from rent
62700
price of property after 5 years
current price*(1+r)^n = 265000*(1.02)^5
292581.4
capital gain on investment
291581.4-265000
26581.4
total return earned during 5 year period
62700+26581.4
89281.4
rate of return
89281.4/265000
33.69%
Investment in REIT
total dividend earned during 5 year period
265000*3.5%*5
46375
price of REIT investment after 5 years
current price*(1+r)^n = 265000*(1.03)^5
307207.6
capital gain on investment
307207.6-265000
42207.6
total return earned during 5 year period
46375+42207.6
88582.6
rate of return
88582.6/265000
33.43%
it is better to invest in property
Buy a duplex house
total revenue for 5 years
550*2*60
66000
less total expenses
66000*5%
3300
net revenue from rent
62700
price of property after 5 years
current price*(1+r)^n = 265000*(1.02)^5
292581.4
capital gain on investment
291581.4-265000
26581.4
total return earned during 5 year period
62700+26581.4
89281.4
rate of return
89281.4/265000
33.69%
Investment in REIT
total dividend earned during 5 year period
265000*3.5%*5
46375
price of REIT investment after 5 years
current price*(1+r)^n = 265000*(1.03)^5
307207.6
capital gain on investment
307207.6-265000
42207.6
total return earned during 5 year period
46375+42207.6
88582.6
rate of return
88582.6/265000
33.43%
it is better to invest in property
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