Question

1. Ben has a home and is ready to purchase his first rental property. Ben found a property that needs some work so he can get a low price. He will use his own cash. The home is listed for $125,000 and it will need about $25,000 of rehab expense while he does the work himself over one year, at which time he will rent it out. He thinks that he will wait until the second year to do the roof and replace the HVAC system for $15,000. This area rents homes this size for $1,850 per month. Ben anticipates selling the rented, renovated home at the end of 5 years for $185,000 and move on to something bigger. If Ben wants at least 11% on his money, what is the most that he should pay for this home?

If Ben pays the asking price, what is his IRR?

** the $15,000 isn't included in the $25,000

Answer 1

Please see the table below. All financials are in $. Please see the second column to understand the mathematics. The last row colored in yellow contains your answer.

the most that he should pay for this home = PV of all the future cash flows = $ 137,140.55

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If Ben pays the asking price,

IRR = 13.00%