Determine if it would be economically better for you to buy a home or rent an apartment.

Content

Imagine you have decided to stay at the university six more years to do a masters degree and then a PhD. (Dont worry this is fictitious; and besides, on the happy side, we will also imagine you can afford to buy a house ). The question is whether it would be economically better to buy a home and sell it in six years or is it better to just rent an apartment.

To work out this problem you will need to make a few assumptions3. Figure 1 shows the cash flow diagram that you will assume for each alternative and Table 2 describes the cash flows. You may choose to include other items, such as utilities, parking fees, association fees, etc. You might even want to think of a dollar value to put on a few non-monetary costs and benefits (see question 4 below). Use Future Worth Analysis to compare the two alternatives.

3 The choice to buy or rent is complicated and complex. More information can be found in this New York Times article: http://www.nytimes.com/2008/05/28/business/28leonhardt.html

Choose your MARR. Assume your MARR is adjusted for inflation.

Show your estimates for all the items in Table 2. In your report, include sources and assumptions.

Also, answer these questions:

1. Based only on future worth analysis, which alternative should you choose?

2. How do you think the calculated FW would change if you only lived there for 2 yrs? What about 25 yrs?

3. Your annual house payment is probably more than your annual rent; so, when we conduct an economic analysis like this, what are we assuming about your "extra" money each month if you rent?

4. What are some of the risks involved with each alternative? ENGI 4102 Course Project 5

Equity

Selling closing costs

Tax break

0

Alternative 1:

Buy a home and sell it after 6 years

6 Years

Down payment and buying closing costs

Monthly loan payment, property taxes, home owners insurance, mortgage insurance and repair and annual repair and maintenance

Alternative 2: Rent for 6 years

Figure 1. Cash flow for part b

0

6 Years

Deposit returned

g= annual percentage increase in annual rent

Deposit

Monthly rent

Table 2. Terms for part b Item	Comment
Down payment and buying closing costs	You can use your values from part a.
House payments	You can use your values from part a.
Routine repair and maintenance	Annual repair costs can be estimated based on the age of the house.
Tax break	This depends on your income, marital status, and other tax deductions. For this report, you can estimate your annual tax break as 25% of your monthly loan payment times 12.
Equity	Equity is the portion of the value of the home that you own. You can calculate equity by subtracting the appreciated sales price after six years minus the amount of remaining balance you owe to your lender. Alternatively, you can calculate equity by summing three things: (1) your down payment when you bought the house, (2) the sum of the portion of your monthly loan payment that is applied to the principal for the 72 months, and (3) any appreciation above your purchase price.
Appreciation	Use a realistic estimate. Usually appreciation rates are an annual percentage, so use the single payment compound amount equation to calculate the appreciation after six years.
Selling closing costs	Can be estimated as a percentage of the selling price.
Deposit	Use a value you are familiar with.
Rent	Use a value you are familiar with.
g (annual percentage increase change in annual rent)	Can be estimated based on your experience or some other source.