Say that you purchase an apartment complex for $655,000. The property value increases by 2.6% every year. The complex has five units, which you rent out for $490 per month. Upkeep on the building costs you $13,800 per year. Assuming that you are able to keep all of the units rented out constantly, after eight years, will you have gained more money from appreciation of the property or from renting out the apartments, and how much more money will you have gained from that source than from the other, to the nearest hundred dollars?
Answer
A
You will gain $19,500 more from the rent than from the appreciation.
B
You will gain $16,900 more from the rent than from the appreciation.
C
You will gain $24,500 more from the appreciation than from the rent.
D
You will gain $10,700 more from the appreciation than from the rent.
Explanation
The property’s appreciation after eight years is $655,000 × [(1.026)^8 − 1], or about $149,300. Rent brings in $490 × 5 × 12 = $29,400 per year; after $13,800 in annual upkeep, that is $15,600 per year, or $124,800 over eight years. Appreciation is therefore about $24,500 greater, so the correct choice is “$24,500 more from the appreciation than from the rent.”
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