Problem 1: Lease vs. Buy

You are doing an analysis of whether to lease a property or purchase a single-family house for personal use. The property can be leased for $1,400 per month on a 12-month lease. The lease rates are expected to raise by 5% per year. As a tenant you are responsible full utility charges like heating, electricity and water/sewer. As a tenant you will also incur renter insurance for $10/month, and the rates are expected to grow at 5% per year.

The same house can be purchased for $225,000. The property value is expected to grow at 4% per year. Property Tax in the area is 1.7% of market value. Property maintenance is expected to be $900/year and expected to escalate at 3.5% per year. Homeowner property insurance (hazard and theft) is $80/month and expected to escalate at the same rate as property maintenance.

When you sell the property you will incur a real estate commission of 6% of the sales price and a flat $1,200 closing charges.

If you decide to purchase the house, you will put down $10,000 as the down payment. The rest of the money required for purchase will be financed thru two mortgages listed below.

Mortgage 1. Loan Amount $160,000. Term 30 years with end of month payments, interest = 7.2 percent.

Mortgage 2. Loan Amount $55,000. Term 15 years with end of month payments, interest = 9 percent.

Assume you are at an incremental Federal Tax rate of 22%.

Comment on how the results of the template output can be used to decide whether you want to lease or buy the house. Discuss the results separately for following 3 scenarios.

1. You plan to live in the house for one year
2. You plan to live in the house for 3 years
3. You plan to live in the house for 5 years