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.
To determine the minimum rent you would be willing to receive for renting out your lake house, you need to consider your costs and the financial implications of renting it out.
First, let's break down the costs:
1. Mortgage payment: $1000 per month - This is the monthly payment you have to make towards the mortgage on the lake house. Regardless of whether you rent it out or not, you still need to cover this expense.
2. Upkeep and maintenance (occupied): $200 per month - This cost includes maintenance and upkeep expenses specific to when the lake house is being rented out. This could include cleaning services, repairs, landscaping, or other necessary maintenance activities that need to be carried out during occupancy.
3. Upkeep and maintenance (not rented): $0 per month - If the lake house is not rented out, you don't need to spend any additional money on upkeep and maintenance. This cost does not apply in this scenario.
Based on this breakdown, your minimum rent should cover at least the mortgage payment of $1000 since that is a fixed cost that remains the same regardless of occupancy.
However, it would be wise to consider additional factors to make the rental financially viable:
1. Profit margin: Ideally, you would want to make a profit or at least break even after covering the mortgage payment. It's important to factor in any other expenses or potential income streams (e.g., rental income from the lake house) to determine the minimum rent required to achieve your financial goals.
2. Market research: It's crucial to research the rental market in the area where your lake house is located. Understanding the demand for similar properties and their rental prices will give you an idea of what price range you should aim for.
3. Local regulations: Consider any legal or regulatory requirements, such as taxes or permits, that might impact your rental income. Ensure compliance to avoid any issues or penalties.
In regard to the irrelevant information, the cost of upkeep and maintenance when the house is not rented is irrelevant for determining the minimum rent you would be willing to receive. This is because regardless of whether the house is rented or not, this cost remains zero. Therefore, it doesn't factor into the decision-making process.
In summary, the minimum rent you would be willing to receive should cover at least the mortgage payment to ensure your financial obligations are met. However, additional factors like profit margin, market research, and local regulations should also be considered to determine a realistic and viable rental price.