Real Estate Investing

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 6
Out flows
Down payment + Origination $93,000
Insurance & Maintenance $11,250 $11,531 $11,820 $12,115 $12,418 $12,728
Property tax $7,875 $8,072 $8,274 $8,481 $8,693 $8,910
Mortgage 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 $12,884
Principal payments $6,340 $6,598 $6,867 $7,147 $7,438 $7,741
House value $450,000 $461,250 $472,781 $484,601 $496,716 $509,134 $521,862
Total 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

WE ACCEPT