# Sam purchased a home for $150,000 with some creative financing. The bank, which agreed to lend Sam

## Question:

Sam purchased a home for $150,000 with some creative financing. The bank, which agreed to lend Sam $120,000 for 6 years at 15% interest, took a first mortgage on the house. The Joneses, who sold Sam the house, agreed to lend Sam the remaining $30,000 for 6 years at 12% interest. They received a second mortgage on the house. Thus Sam became the owner without putting up any cash. Sam pays $1500 a month on the first mortgage and $300 a month on the second mortgage. In both cases these are "interest only". loans, and the principal is due at the end of the loan. Sam rented the house, but after paying the taxes, insurance, and so on, he had only $800 left. so he was forced to put up $1000 a month of his own money to make the monthly payments on the mortgages. At the end of 3 years, Sam sold the house for $205,000. After paying off the two loans and the real estate broker, he had $40,365 left. After taking an 8% inflation rate into account, what was his before-tax rate of return?

## Step by Step Answer:

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