Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

You are considering an option to purchase or rent a single residential property. You can rent it for $ 4 , 6 0 0 per

You are considering an option to purchase or rent a single residential property. You can rent it for $4,600 per month and the owner
would be responsible for maintenance, property insurance, and property taxes. Alternatively, you can purchase this property for
$203,900 and finance it with an 80 percent mortgage loan at 4 percent interest that will fully amortize over a 30-year period. The loan
can be prepaid at any time with no penalty.
You have done research in the market area and found that (1) properties have historically appreciated at an annual rate of 2 percent
per year, and rents on similar properties have also increased at 2 percent annually; (2) maintenance and insurance are currently
$1,539.00 each per year and they have been increasing at a rate of 3 percent per year; (3) you are in a 24 percent marginal tax rate
and plan to occupy the property as your principal residence for at least four years; (4) the capital gains exclusion would apply when
you sell the property; (5) selling costs would be 7 percent in the year of sale; and (6) property taxes have generally been about 2
percent of property value each year.
Based on this information you must decide
Required:
a. In order to earn a 10 percent IRR after taxes on your equity, should you buy the property or rent it for a four-year period of
ownership?
b. What if your expected period of ownership was to change to five years? Would owning or renting be better if you wanted to earn a
10 percent IRR after taxes?
c. Approximately, what level of rents would make you indifferent between owning and renting for a four-year period? Assume that a 5
percent after-tax IRR would be the minimum you would need to earn on capital invested in the home.
image text in transcribed

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

The Routledge Handbook Of State Owned Enterprises

Authors: Luc Bernier, Massimo Florio, Philippe Bance

1st Edition

1138487694, 978-1138487697

More Books

Students also viewed these Finance questions

Question

Distinguish among spoilage, rework, and scrap.

Answered: 1 week ago