In May 2013, Rebecca Young completed her MBA and moved to Toronto for a new job in investment banking. There, she rented a spacious, two-bedroom condominium for $3,000 per month, which included parking but not utilities or cable television. In July 2014, the virtually identical unit next door became available for sale with an asking price of $620,000, and Young believed she could purchase it for $600,000. She realized she was facing the classic buy-versus-rent decision. It was time for her to apply some of the analytical tools she had acquired in business school including time value of money concepts to her personal life. While Young really liked the condominium unit she was renting, as well as the condominium building itself, she felt that it would be inadequate for her long-term needs, as she planned to move to a house or even to a larger penthouse condominium within five to 10 years even sooner if her job continued to work out well. Friends and family had given Young a variety of mixed opinions concerning the buy-versus-rent debate, ranging from youre throwing your money away on rent to its better to keep things as cheap and flexible as possible until you are ready to settle in for good. She realized that both sides presented good arguments, but she wanted to analyze the buy-versus-rent decision from a quantitative point of view in order to provide some context for the qualitative considerations that would ultimately be a major part of her decision.

If Young purchased the new condominium, she would pay monthly condo fees of $1,055 per month, plus property taxes of $300 per month on the unit. Unlike when renting, she would also be responsible for repairs and general maintenance, which she estimated would average $600 per year.If she decided to purchase the new unit, Young intended to provide a cash down payment of 20 per cent of the purchase price. There was also a local deed-transfer tax of approximately 1.5 per cent of the purchase price, and a provincial

deed-transfer tax of 1.5 per cent, both due on the purchase date. (For simplicity, Young planned to initially ignore any other tax considerations throughout her analysis.) Other closing fees were estimated to be around $2,000. In order to finance the remaining 80 per cent of the purchase price, Young contacted several lenders and found that she would be able to obtain a mortgage at a 4 per cent quoted annual rate that would be locked in for a 10-year term and that she would amortize the mortgage over 25 years, with monthly payments. The money that Young was planning to use for her down payment and closing costs was presently invested and was earning the same effective monthly rate of return as she would be paying on her mortgage. Young assumed that if she were to sell the condominium say, in the next two to 10 years she would pay 5 per cent of the selling price to realtor fees plus $2,000 in other closing fees.

1. Determine the required monthly payments for the mortgage.

2. Determine the opportunity costs on a monthly basis, of using the required funds for closing (i.e. down payment plus all closing costs), rather than leaving those funds invested earning the monthly effective rate (determined in ques 1).

3. Determine the monthly additional payments required to buy versus rent (including the monthly opportunity costs computed in ques 2).

4. Determine the principal outstanding on the mortgage after:

Two years;

Five years;

Ten years.

5. Determine the net future gain or loss after two, five and ten years under the following scenarios which Rebecca Young has determined are possible after some due diligence regarding future real-estate prices in the Toronto condo market:

a. Condo prices remain unchanged;

b. The condo price drops 10% over the next two years, then increases back to its purchase price by the end of five years, then increases by a total of 10% from the original purchase price by the end of ten years;

c. The condo price increases annually by the annual rate of inflation of 2% over the next ten years;

d. The condo price increases annually by the annual rate of 5% over the next ten years.

6. As Rebecca Young, what decision would you make? Describe any qualitative considerations that would factor into your decision.