Final answer:
To determine the higher rate of return on the rental property investment, calculate the total rental income over 15 years with and without renovation and compare it to the initial investment. It's necessary to consider the additional $70,000 investment for remodeling and its impact on the monthly rental income. The remodeled property yields a higher net gain and therefore a higher rate of return.
Step-by-step explanation:
Calculating the Rate of Return for Real Estate Investment
When deciding whether to remodel a rental property, it's important to calculate the potential rate of return on the investment. In this scenario, a property purchased for $250,000 could be rented for $2,000/month without renovations, and for $2,800/month after a $70,000 remodel. Over 15 years, without renovation, the total rental income would be $2,000 x 12 months x 15 years = $360,000.
With renovation, the rental income over the same period would be $2,800 x 12 months x 15 years = $504,000. However, the initial investment for the renovated property is $250,000 + $70,000 for remodeling, totaling $320,000.
Without renovation, the rate of return on the $250,000 investment would be $360,000 in received rent. With renovation, home remodeling increases the total investment to $320,000 and the rental income to $504,000. To determine which option yields a higher rate of return, compare the net gains ($360,000 - $250,000 = $110,000 without renovation; $504,000 - $320,000 = $184,000 with renovation) and calculate the rate of return as a percentage of the initial investment.