Rent versus Own Analysis

Compare renting versus owning a home. Assume a property can be rented for $12,000 per year ($1,000 per month) or purchased for $150,000 with $30,000 down and financed with a fully amortizing mortgage loan of $120,000 at 7 percent interest for 30 years. Other costs associated with owning include maintenance costs of $500, insurance costs of $500, and property taxes of 2% of the purchase price. Assume the federal income tax rate is 28 percent. Growth rates for expenses (insurance, maintenance, property taxes), rents, and property value are a constant 2 percent per year. After five years, the property will be sold. Selling expenses of 7 percent would have to be paid at that time. Be sure to show your work in Excel. In other words, do not simply type values into the boxes, but reference prior cells when calculating results. In your report, identify how much money is saved from owning relative to renting after selling the house in year 5. If an annual after-tax return of 15% is available on an investment of comparable risk, which is the better option, owning or renting?

Part 1: Monthly Payment Fill in the two tables, for property information and loan information, respectively.

Part 2: CPM Loan Fill in the loan schedules and property data.

Part 3: CAM LoanFill in the cash flow tables.

FINC 4355 - Project 2 - Rent versus Own Analysis Part 1) Propery and Loan Information Property Information Purchase price Initial Rent Rental growth rate Property growth rate Insurance Maintenance Expense growth rate Marginal tax rate Property tax % Selling expenses % Part 2) Loan Schedule and Property Data Loan Schedule (5 years) Month Beginning Loan Balance Monthly Payment 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 Summary Loan Schedule End of year Payment Balance Interest Principal 1 2 0 1 1 2 1 2 1 2 1 2 Property Data Year Property value Rents Part 3) Cash Flow Analysis Before-Tax Cash Flows-Owner Year Property taxes Insurance Maintenance Principal and Interest Cash Outflows before taxes Before-Tax Cash Flows-Owner Year Property taxes Interest Total tax deductions Tax savings Rents Year Rents Net Cash Flows-Owner Year Cash outflows before taxes Tax savings After tax cost Cost of renting After tax cash flow own vs. rent Before-Tax Cash Flows-Sales Year Sales price Selling Costs Mortgage balance Benefit from sale After-tax cash flow-sales Cash Savings and IRR Years Cash flow 1 2 0 1 Loan Information Loan amount Loan-to-value ratio Interest rate Loan term (years) Payments (per year) Equity investment (down payment) Periodic (monthly) rate Number of periods Monthly loan Payment Interest Hint: Use the Excel PMT function Amortization Ending Loan Balance 3 4 5 Hint: Monthly loan payment * 12 Hint: Ending loan balance at year end Hint: Use sum Excel function to find sum of Hint: Use sum Excel function to find sum of 2 3 4 3 4 5 5 Hint: Use the FV formula for one period Hint: Use the FV formula for one period Hint: Use the FV formula for one period Hint: The annual payment on the loan Hint: Sum the values above 3 4 5 Hint: Same values as above Hint: Values from the summary loan schedu Hint: Sum of property taces and interest Hint: Total tax * income tax rate 3 4 5 Hint: Same values from property data 3 4 5 Hint: Tax savings - cash outflows vefore taxe Hint: After tax cost + cost of renting 3 4 5 Hint: Same as benefit from sale above, due 2 3 4 5 hly loan payment * 12 ng loan balance at year end um Excel function to find sum of amortization over each year um Excel function to find sum of interest over each year Hint: Use the FV formula for one period Hint: Use the FV formula for one period he FV formula for one period he FV formula for one period he FV formula for one period nnual payment on the loan the values above e values as above s from the summary loan schedule of property taces and interest tax * income tax rate e values from property data avings - cash outflows vefore taxes tax cost + cost of renting e as benefit from sale above, due to tax exclusions IRR Hint: The down payment at time zero is a cash outflow (negative) Hint: The cash flows in years 1 to 4 are the after tax cash flows of owning compared to renting Hint: The cash flow includes the sum of the after tax cash flow of owning relative to renting and after tax cash flow f nting and after tax cash flow from the sale