TIME VALUE OF MONEY: THE BUY v. RENT DECISION After graduating from FGCU with a degree in Finance, you moved to (INSERT CITY SELECTED) to start your dream job as a financial analyst. Prior to arriving to the city, you rented a centrally located condominium. It is small, but you did not have many options available at the time. The Condominium is nice, furnished, has one bedroom and one bathroom. You pay S2,500 per month in rent, which includes cable, but no other utilities. You have to pay an additional $150 per month for a parking spot. Your lease expires in a month and you are reviewing your options You have the option of renewing your lease at the same rate or of purchasing a condominium unit similar to the one that you are presently renting. You plan on getting married next year and will likely purchase a house outside the city in about 8 to 10 years. There are quantitative and qualitative factors that will play into your decision. You must analyze each of these FINANCIAL DETAILS The asking price for the condominium that you could buy is $550,000, but you think that you can negotiate it down to $525,000. If you purchase the condominium, you will incur monthly HOA Fees of $1,000, real estate property taxes of $450.00 per month, and insurance costs of $150 per month. When you close, you will incur documentary stamp taxes of $.70 per $100 of the purchase price and other fees totaling approximately $3,000. You plan on putting 20% of the purchase price as a down payment and will finance the remaining 80%. You can obtain a 10-year fixed rate mortgage at an APR of 5.25%, amortized over 25 years. The 20% that you plan on using for your down payment is presently invested at an APR of 5.25%. You estimate that if you sell your condominium in the next 2 to 10 years, you would pay 6.5% of the selling price as a broker's commission, plus an additional S3,000 in closing costs SCENARIO ANALYSIS In order to complete your analysis, you will have to do the following 1. Figure out the monthly mortgage payment; 2. Figure out the monthly opportunity cost of using the 20% down payment rather than leaving the funds invested and earning the effective monthly rate (same as the mortgage rate Compare the additional monthly payments required to buy the condominium compared to renting, including the opportunity cost 3. 4. Model the outstanding principal balance at the end of years 2, 5, and 10 5. Determine the net future gain or loss after 2, 5, and 10 years under the following scenarios The condo price remains unchanged The condo price drops 15% over the next 2 years. then increases back to its purchase price by the end of 5 years, then increases by a total of 15% from the original purchase price by the end of 10 years; a. b. TIME VALUE OF MONEY: THE BUY v. RENT DECISION After graduating from FGCU with a degree in Finance, you moved to (INSERT CITY SELECTED) to start your dream job as a financial analyst. Prior to arriving to the city, you rented a centrally located condominium. It is small, but you did not have many options available at the time. The Condominium is nice, furnished, has one bedroom and one bathroom. You pay S2,500 per month in rent, which includes cable, but no other utilities. You have to pay an additional $150 per month for a parking spot. Your lease expires in a month and you are reviewing your options You have the option of renewing your lease at the same rate or of purchasing a condominium unit similar to the one that you are presently renting. You plan on getting married next year and will likely purchase a house outside the city in about 8 to 10 years. There are quantitative and qualitative factors that will play into your decision. You must analyze each of these FINANCIAL DETAILS The asking price for the condominium that you could buy is $550,000, but you think that you can negotiate it down to $525,000. If you purchase the condominium, you will incur monthly HOA Fees of $1,000, real estate property taxes of $450.00 per month, and insurance costs of $150 per month. When you close, you will incur documentary stamp taxes of $.70 per $100 of the purchase price and other fees totaling approximately $3,000. You plan on putting 20% of the purchase price as a down payment and will finance the remaining 80%. You can obtain a 10-year fixed rate mortgage at an APR of 5.25%, amortized over 25 years. The 20% that you plan on using for your down payment is presently invested at an APR of 5.25%. You estimate that if you sell your condominium in the next 2 to 10 years, you would pay 6.5% of the selling price as a broker's commission, plus an additional S3,000 in closing costs SCENARIO ANALYSIS In order to complete your analysis, you will have to do the following 1. Figure out the monthly mortgage payment; 2. Figure out the monthly opportunity cost of using the 20% down payment rather than leaving the funds invested and earning the effective monthly rate (same as the mortgage rate Compare the additional monthly payments required to buy the condominium compared to renting, including the opportunity cost 3. 4. Model the outstanding principal balance at the end of years 2, 5, and 10 5. Determine the net future gain or loss after 2, 5, and 10 years under the following scenarios The condo price remains unchanged The condo price drops 15% over the next 2 years. then increases back to its purchase price by the end of 5 years, then increases by a total of 15% from the original purchase price by the end of 10 years; a. b