Assume that you own a lake house. Unfortunately your job will require that you spend the summer on the road and you won’t be able to enjoy it. You decide that you will rent it out for the summer while you are working. The mortgage payment on the lake house is $1000 per month and the upkeep and maintenance if it is occupied is $200 month but zero if it is not rented. What is the minimum rent that you would be willing to receive and why? What information is irrelevant in your decision? Explain.
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Assume that you own a lake house. Unfortunately your job will require that you spend the summer on the road and you won’t be able to enjoy it. You decide that you will rent it out for the summer while you are working. The mortgage payment on the lake house is $1000 per month and the upkeep and maintenance if it is occupied is $200 month but zero if it is not rented. What is the minimum rent that you would be willing to receive and why? What information is irrelevant in your decision? Explain.
1,200
To determine the minimum rent you would be willing to receive for renting out your lake house, you need to consider the costs associated with the property. In this case, the mortgage payment is $1000 per month, and the upkeep and maintenance cost is $200 per month if the house is occupied. However, it is zero if the house is not rented.
To calculate the minimum rent, you need to cover your mortgage payment and the maintenance costs associated with the property while it is occupied. So, the minimum rent would be the sum of these two costs, which is $1000 + $200 = $1200 per month.
In this scenario, the irrelevant information in making your decision is the fact that the maintenance cost is zero if the house is not rented. Since you have already established that you plan to rent it out for the summer while you are working, the maintenance costs will exist only while the house is occupied. Therefore, the fact that the maintenance cost is zero if the house is not rented does not impact the calculation for the minimum rent you should receive.