a. Should you (or a person with similar expectation to yours) buy or rent a property in the area you explored?a. Should you (or a person with similar expectation to yours) buy or rent a property in the area you explored?
b. If you were to buy the average property you considered, what would be your imputed rent? In other words, how much would it cost you per month to live in your own home?
c. At what price you would need to purchase the average property in order to be indifferent between buying and renting?
d. What is the minimum annual rate of property appreciation on the average property in order to be better off buying than renting? Do you think that this rate of appreciation is reasonable?
e. What annual rate of property appreciation should you expect on the average property in order for the imputed rent to be zero? Do you think that this expectation is reasonable?
Input Variables Inflation expectation 2.00% Down payment 20% Purchase price $450,000 Loan amount $360,000 Initial monthly rent $2,400 Interest rate (Fixed) 4.00% Rental growth rate 2.50% Mortgage initiation fee $3,000 Property appreciation 2.50% Loan maturity (years) 30 Insurance $6,750 Mortgage Payment $1,718.70 Maintenance $4,500 Holding period (years) 6 Expense growth 2.50% Selling expenses 6.50% Marginal tax rate 28.00% Invetments opportunity 8.50% Property tax $7,875 Option 1: Buy the house Year 0 1 2 3 4 5 6Out flows Down payment + Origination $93,000 Insurance & Maintenance $11,250 $11,531 $11,820 $12,115 $12,418 $12,728Property tax $7,875 $8,072 $8,274 $8,481 $8,693 $8,910Mortgage payments $20,624 $20,624 $20,624 $20,624 $20,624 $20,624 Total: $93,000 $39,749 $40,227 $40,718 $41,220 $41,735 $42,263 In flow Tax benefits $0 $6,205 $6,187 $6,169 $6,148 $6,126 $6,102 Overall “out of pocket” $93,000 $33,545 $34,040 $34,549 $35,072 $35,609 $36,160 Other Interest payment $14,285 $14,026 $13,758 $13,478 $13,187 $12,884Principal payments $6,340 $6,598 $6,867 $7,147 $7,438 $7,741House value $450,000 $461,250 $472,781 $484,601 $496,716 $509,134 $521,862Total equity $90,000 $107,590 $125,719 $144,405 $163,667 $183,523 $203,992 Cash at time sold $203,992 Option 2: Rent the house Rent expenses $28,800 $29,520 $30,258 $31,014 $31,790 $32,585 Investments portfolio $93,000 $105,650 $119,150 $133,568 $148,979 $165,461 $183,101