a. Answer: Input Variables Inflation expectation 2.00% Down payment 30% Purchase price $230,000 Loan amount $161,000 Initial monthly rent $1,800 Interest rate (Fixed) 4.00% Rental growth rate 2.00% Mortgage initiation fee $3,000 Property appreciation 2.00% Loan maturity (years) 30 Insurance $3,450 Mortgage Payment $768.64 Maintenance $2,300 Holding period (years) 5 Expense growth 2.00% Selling expenses 6.50% Marginal tax rate 25.00% Invetments opportunity 8.50% Property tax $4,025 Option 1: Buy the house Year 0 1 2 3 4 Out flows Down payment + Origination $72,000 Insurance & Maintenance $5,750 $5,865 $5,982 $6, 102 Property tax $4,025 $4, 106 $4, 188 $4,271 Mortgage payments $9,224 $9,224 $9,224 $9,224 Total: $72,000 $18,999 $19,194 $19,394 $19,597 In flow Tax benefits $0 $2,603 $2,595 $2,585 $2,575 Overall "out of pocket" $72,000 $16,395 $16,600 $16,809 $17,022 Other Interest payment $6,388 $6,273 $6, 153 $6,028 Principal payments $2,835 $2,951 $3,071 $3, 196 House value $230,000 $234,600 $239,292 $244,078 $248,959 Total equity $69,000 $76,435 $84,078 $91,935 $ 100,013 Cash at time sold Option 2: Rent the house Rent expenses $21,600 $22,032 $22,473 $22,922 nvestments portfolio $72,000 $72,915 $73,681 $ 74,279 $74,693