The house you like costs $200,000. You expect home values to increase by 10% every year. Property taxes: 2% of house value, due at the end of each year. (In other words, the property taxes due at the end of year 1 are based on the house value in year 0.) Maintenance: $1,000 per year. You would take a home mortgage loan with an LTV of 80%. Loan information: 30-year term, fully amortizing with fixed annual payments, 5% annual interest rate, remaining balance due upon house sale. When you sell the house the estimated selling expenses are $5,000, and you expect no capital gain taxes.

If you instead rent a house just like this one, youd be paying $15,000 on rent every year.

Your income puts you in a 25% income tax bracket.

Calculate the after-tax cash flows if you buy rather than rent. Use them to calculate the after-tax Internal Rate of Return (ATIRR).

(a) If you can earn a 45% annual return on other investments, investing your money into this house and selling it after 2 years is a 0123456789 (use "1" for "good" or "2" for "bad") idea financially. That's because the calculated IRR is (use "1" for "greater than" or "2" for "lower than") the 20% required annual return. The calculated after-tax IRR equals . % (round to 2 decimal places; use "0" for any blank values).

(b) If you can earn a 45% annual return on other investments, investing your money into this house and selling it after 3 years is a 0123456789 (use "1" for "good" or "2" for "bad") idea financially. That's because the calculated IRR is 0123456789 (use "1" for "greater than" or "2" for "lower than") the 45% required annual return. The calculated after-tax IRR equals . % (round to 2 decimal place; use "0" for any blank values).

(c) Using 45% as your required return, in order for you to be indifferent between buying and not buying for 3 years, the LTV needs to approximately equal %. (HINT: Use "goal seek" in Excel!)