You are considering an option to purchase or rent a single residential property. You can rent it for

$$2,800$ per month and the owner would be responsible for maintenance, property insurance, and

property taxes. Alternatively, you can purchase this property for $$201,200$ 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 $$1,512\mathrm{.}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.