Thread: Rate of Total Return (business)

Roberto and Talia Luongo are considering the purchase of a condominium as an investment. The purchase price of $145,000 includes major appliances. They would pay 30% of the purchase price using their own money and borrow the remaining 70% on a mortgage loan. They should be able to rent the condo for $850 per month. Their expected expenses are: property taxes of $1800 per year, strata corporation (maintenance) fees of $130 per month, and mortgage interest of $6160 in the first year. What will be the Luongo's rate of total return (on their own money) during the first year if the property decreases in value by 2%?

Formulas (in case u need them)

I need to find the capital gain yield + Income gain yield in order to find the rate of total return.

Answer is -5.10

Their investment = 30% = .3*145,000 = 43,500

Income from investment in the first year = $850/mo * 12mo. = $10,200

Expenses for one year =

-$1800 + (-$130/mo*12mo) + (-$6160) = -$9520

depreciation of investment = -(2% of house) = -(.02*$145,000) = -$2900

To get the rate of return we divide there net earnings for one year by the total investment

Net earnings = $10,200 - $9520 - $2900 = -$2220

-2220/43500 = 0.051

first of all,
thanks very much.

second of all,
you are wizard of wizards.