Assume you are a real estate investor who wants to turn a profit on Air BNB. You
ID: 412154 • Letter: A
Question
Assume you are a real estate investor who wants to turn a profit on Air BNB. You purchase a house for $200,000 cash. You invest $50,000 cash in renovations and furnishings. You are able to rent out the home 20 times the first year, and 25 times the second year at a rate of $190 per night (5 nights per stay.) AirBNB charges you a 1% commission. You also have a cleaning service at $250 per visit. Annual taxes are $1350 plus $1200 annual home insurance. (Don't forget, 2 years!) Calculate:
• Initial Investment: $200,000
• Costs: $50,000 renovations & Furnishings
• Total Investment: $250,0000
• Gross profit: (20 + 25)= 45 * ($190 * 5) = 42,750
• Net Profit / Return =
• Return on Investment = (as a %)
• Was this a good investment?
Can you please explain how to figure this problem out? I've never been good at word problems but If you can explain this to me, I will be able to work the problem out. Thanks!
Explanation / Answer
Following are the relevant data for calculation of Return on investment:
Initial investment = $200,000
Renovation and furnishing cost = $50,000
Total investment = $250,000
Gross profit = ( 20 times + 25 times) x 5 nights/ stay x $190 / night = $42750
Costs to be deducted from Gross profit :
Commission payable to Air BNB ( @ 1% of gross profit ) = $4275
Cleaning service cost = $250 / visit x ( 20 + 25 visits) = $250 x 45 = $11250
Annual taxes = $1350 / year x 2 years = $2700
Annual home insurance = $1200 / year x 2 years = $2400
Thus, total cost = $4275 + $11250 + $2700 + $2400 = $20625
Thus , net profit = Gross profit – Total cost = $42750 - $20675 = $22075
Therefore,
Return on investment = Net profit / Total investment x 100 = 22075 / 250,000 x 100 = 8.83%
This will be termed as a good investment if 8.83% > Cost of capital related with the investment made.
Since , no specific figure for cost of capital has been provided here, no absolute statement cant be made. However , as said, it should be considered as a good investment if 8.83 % is greater than cost of capital.
Trust your queries are clarified .