BUSINESS 3400- You are considering buying a beach house as an investment
Subject: Business / Finance
Question
You are considering buying a beach house as an investment property. The price today for the beach house is $270,000. You can fully depreciate the house on a straight-line basis over the next thirty years. You will charge $20,000 in rent per year and face maintenance costs of $5,000 every year for the next thirty years. Assume that the tax rate for income on the property is 40%, and the tax rate for capital gains on the property is 20%. Also, assume that the appropriate discount rate for your calculations is 10%. You plan to sell the property in thirty years and expect the value of the property to appreciate at an annual rate of 3%.
What is the present value of the annuity of annual cash flows from the property (i.e. all the cash flows excluding the cost of buying the beach house today and the after-tax profit from selling the house in thirty years)?
Estimate the after-tax selling price of the property.
What is the net present value of the investment?
