Question

As an investor you want to make an investment of $350,000 in a property today. That will bring a monthly income of $800 (based on a $1,200 monthly rent and a $400 monthly operating expense) for the next 4 years (48 months). You expect the property to appreciate to be worth $400,000 at the end of the 4th year. What internal rate of return (IRR) may be obtained on this investment if other expenses and fees are not considered and the property can be sold for the anticipated price in three years? (For the simplicity of the calculation, monthly income occurs at the end of each month, and the sale price will be added to your account in 4 years along with the 48th monthly income.

Answer 1

To calculate the internal rate of return for the property investment, one must consider the initial investment, monthly income of $800 over 48 months, and the property's final sale value of $400,000. The IRR is the rate that makes the net present value of these cash flows zero, and it can be found using financial tools or software.

Step-by-step explanation:

The question is asking to calculate the internal rate of return (IRR) for an investment in property that is expected to generate a monthly income and appreciate in value over a 4-year period. To calculate the IRR, one would use the cash flows from the monthly income, the initial investment, and the final property value at the end of the period. The IRR is the discount rate that makes the net present value (NPV) of the cash flows equal to zero.

The initial investment is $350,000. The monthly income is calculated by taking the monthly rent of $1,200 and subtracting the operating expense of $400, resulting in $800 a month for 48 months. At the end of the 4th year, along with the last monthly income, the property is also sold for $400,000. The IRR would be the rate at which the present value of these cash inflows equals the initial investment of $350,000.

Although the exact IRR is not provided here, one would typically use financial calculation tools or software to determine the IRR based on these cash flows. The calculation would take into consideration the time value of money, and hence the IRR represents the annualized effective compounded return rate which can be compared to other investments.