This project requires you to 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. Afterfive 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. (25 points)

Part 2: CPM Loan Fill in the loan schedules and property data. (25 points) Part 3: CAM Loan Fill in the cash flow tables. (25 points)

FINC 4355 - Project 2 - Rent versus Own Analysis

Last Name First Name

Part 1) Propery and Loan Information

Property Information Loan Information

Purchase price Loan amount

Initial Rent Loan-to-value ratio

Rental growth rate Interest rate

Property growth rate Loan term (years)

Insurance Payments (per year)

Maintenance Equity investment (down payment)

Expense growth rate Periodic (monthly) rate

Marginal tax rate Number of periods

Property tax % Monthly loan Payment Hint: Use the Excel PMT function

Selling expenses %

Part 2) Loan Schedule and Property Data

Loan Schedule (5 years)

Month Beginning Loan Balance Monthly Payment Interest Amortization Ending Loan Balance

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Summary Loan Schedule

End of year 1 2 3 4 5

Payment Hint: Monthly loan payment * 12

Balance Hint: Ending loan balance at year end

Interest Hint: Use sum Excel function to find sum of amortization over each year

Principal Hint: Use sum Excel function to find sum of interest over each year

Property Data

Year 0 1 2 3 4 5

Property value Hint: Use the FV formula for one period

Rents Hint: Use the FV formula for one period

Part 3) Cash Flow Analysis

Before-Tax Cash Flows-Owner

Year 1 2 3 4 5

Property taxes Hint: Use the FV formula for one period

Insurance Hint: Use the FV formula for one period

Maintenance Hint: Use the FV formula for one period

Principal and Interest Hint: The annual payment on the loan

Cash Outflows before taxes Hint: Sum the values above

Before-Tax Cash Flows-Owner

Year 1 2 3 4 5

Property taxes Hint: Same values as above

Interest Hint: Values from the summary loan schedule

Total tax deductions Hint: Sum of property taces and interest

Tax savings Hint: Total tax * income tax rate

Rents

Year 1 2 3 4 5

Rents Hint: Same values from property data

Net Cash Flows-Owner

Year 1 2 3 4 5

Cash outflows before taxes

Tax savings

After tax cost Hint: Tax savings - cash outflows vefore taxes

Cost of renting

After tax cash flow own vs. rent Hint: After tax cost + cost of renting

Before-Tax Cash Flows-Sales

Year 1 2 3 4 5

Sales price

Selling Costs

Mortgage balance

Benefit from sale

After-tax cash flow-sales Hint: Same as benefit from sale above, due to tax exclusions

Cash Savings and IRR

Years 0 1 2 3 4 5 IRR

Cash flow 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 from the sale