Hazels Rent or Buy Decision

Hazel is going off to college for the next three years. He and four of his closest friends have decided to live together off campus and has begun their search for the perfect house, relatively close to the college campus.

If there is a house for sale that Hazel and his roommates like, then he will purchase the house and then rent it to his friends. Once he buys the house, Hazel would be the owner and landlord and will be in charge of managing the property and setting the rent in order for the purchase to make financial sense. Hazel has $25,000 in his bank account and his parents have agreed to give him another $25,000 to help him make the down payment if he decides to buy a house.

After calculating the amount of money he will be able to invest in a house, Hazel decides that he will be able to afford a house with a down payment that is less than or equal to $50,000. Down payments are typically calculated using 20% of the price of the property.

To make the necessary calculations, Hazel has done his research by talking to other homeowners about all the costs associated with managing a house. For buying a house, Hazel will be able to get a 25-year mortgage with an annual interest rate of 3.95%. House mortgage interest is always compounded monthly, not annually. (Hint: To use the PMT function here, divide the annual interest rate by 12, multiply

the 25-year mortgage by 12 to get 300 payments and then multiply the PMT formula by 12 to get the total amount for annual repayments.)

Annual property tax is calculated using 1.4427% of the value of the house from the previous year. Insurance will be $1200 annually and additional maintenance costs will be $2000 annually.

After speaking with many people, Hazel has come up with the average utility costs per month. Hydro and gas will be $100 and $30 per month respectively, with an increase of 50% in the winter months (November to February) and a decrease of 50% in the summer months (May to August) when no one will be occupying the house. Also, the rental on the water heater will be $40 per month. Hazel decides to charge a rent to his friends that does not include the utility bills as he knows that if he charges a gross rental price that includes hydro, gas, and the water heater, his friends will likely consume much more because they will be unaware of the cost. This way, Hazel will only be responsible for paying his own utility bills. Internet and cable will cost Hazel and his friends $70 monthly for eight months.

Historically, house prices in this area are increasing by 2% annually. The cost of the house that Hazel and his friends ends up choosing is $239,000.

While searching for places to live Hazel and his friends found a rental property that they were interested in. In this case, Hazel was responsible for paying the utilities as the rent of $435 per person per month that the landlord charged was non-inclusive of utilities. Utilities, Internet and television costs would be similar to the ones outlined above.

Hazel now needs to decide whether he should rent or buy and what rent he should charge his friends in case he buys. It is time to start crunching numbers. Assume that Hazel would be able to keep the profit after selling the house after 3 years. At the time of selling, the real estate agent would likely charge a 5% commission fee of the final price of the property. Also, any money that sits in Hazels bank account earns an interest of 1%.

a. Build a spreadsheet model to help Hazel take a decision.

b. What happens to the outcome if the rent charged by the landlord varies from $300 to $500 per person per month?