After careful thought, you decided to invest the $10,000 that you saved after your first year of full-time work (you initially decided to go to Europe but your friend decided not to go and you didnt want to go for 3 months by yourself). You recently read some articles on investing (this one in particular) and you know that you are fully capable of investing the money yourself and dont need to hire a financial advisor to invest for you (as this article clearly explains). You decide to purchase a variety of index funds (ETFs) and individual company stocks. You are currently doing research on which stocks / ETFs to buy.

Five years after making your first investment, you now have quite a large savings account. Youve continued to add about $10,000 a year to the savings account and averaged a 7% return on your investments. You did spend some of this on a trip to Europe and paid off your student loan, but you still have $45,000 in savings! You are now considering buying a condo and using your $45,000 as the down payment. You arent sure if that is the best decision though, so you want to analyze the financial impacts of both renting and buying before making a decision. You are only going to consider a five year period because you will likely only want to live in a condo for the next five years.

Information :

• You are currently renting a two bedroom condo in downtown Edmonton for $1,400/month. For simplicity, assume that this rate remains the same over 5 years. Your rent payment includes all expenses, such as condo fees and utilities.

• If you continue to rent, you will continue to invest the $45,000 in the stock market and you expect to earn an average annual return of 7%.

• You could buy a similar condo for $295,000. Since you dont have a 20% down payment, you must add CMHC mortgage insurance to your mortgage. Thus, your total mortgage is $257,000 (after down payment is deducted and insurance added) and your monthly payment is $1,230.

• After five years, you still owe $250,065 on your mortgage. You paid a total of $14,754 in mortgage payments and $7,819 of this went towards interest. You think that you could sell the condo in five years for $310,000. If you sell you will have to pay 5% in realtor fees and 2% in closing costs, so your net proceeds will be $288,300. Thus, you would earn $288,300-250,065 = $38,235 on the sale of the condo.

• If you buy the condo, you will have monthly expenses (assume these dont change) of:

  • $450 condo fees (includes building maintenance and utilities, except heat)

  • $55 heat

  • $180 property tax

  • $45 property insurance

  • $100 condo maintenance (i.e. painting, repairs, new appliances)

1. For each option (rent and buy), calculate for a 5-year period the total in your savings account, your total living expenses, and the total savings minus expenses (see below and attend class for hints on how to calculate these). Include the following completed table in your submission, and show your work outside of the table.

Option	Total Savings	Total Living Expenses	Savings minus Expenses
Rent
Buy

2. What option do you choose (rent, buy, or other) and why? are there any other things would you want to consider when making this decision that arent mentioned in the above description? under what circumstances would your decision change?

• If you rent, calculate your savings as the future value of $45,000, earning 7% annual compound interest.

• If you buy, only consider the total interest paid on your mortgage payments as living expense since the principal amount will be considered savings (the other monthly expenses are also part of the living expense).

• If you buy, your savings at the end of 5 years will be the total net proceeds from the sale of your condo (this incorporates any principal payments you made towards your mortgage).

• There is no right or wrong answer about whether you should rent or buy. You may want to consider other intangible considerations, in addition to the financial results, when making the decision.