Vilfredo is considering buying a house for $220,000 and renting it out for $2,000 per month. If the price suddenly jumps to $250,000, Vilfredo's expected yearly rate of return will

Question

Quizplus · Accepted Answer

The expected yearly rate of return decreases because the increase in the house price (from $220,000 to $250,000) without a corresponding increase in rental income ($2,000 per month or $24,000 per year) means Vilfredo is investing more for the same return. Initially, the return is $24,000/$220,000 = 0.109 or 10.9%. After the price jump, it becomes $24,000/$250,000 = 0.096 or 9.6%.

Vilfredo Is Considering Buying a House for $220,000 and Renting