You own a house that you rent for $1,000 a month. The maintenance expenses on the house average $200 a month. The house cost $85,000 when you purchased it several years ago. A recent appraisal on the house valued it at $220,000. The annual property taxes are $5,000. If you sell the house you will incur $25,000 in expenses. You are deciding whether to sell the house or convert it for your own use as a professional office. What value should you place on this house when analyzing the option of using it as a professional office?

Question

Quizplus · Accepted Answer

When analyzing the option of using the house as a professional office, the rental income is no longer relevant. Therefore, we need to consider the current value of the property, which is $220,000, and subtract the expenses associated with selling the property ($25,000) and the annual property taxes ($5,000). This leaves us with a net value of $190,000. However, we also need to consider the maintenance expenses, which average $200 a month or $2,400 a year. Assuming this expense will continue, we need to subtract it from the net value, which gives us a final value of $195,000. Therefore, the value we should place on the house for the purpose of using it as a professional office is $195,000.

You Own a House That You Rent for $1,000 a Month