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    TVM Buy and Rent Decision

    Uploaded by

    Zahid Usman
    This document presents a case study comparing the costs of buying versus renting a home over various time periods. It calculates the monthly mortgage payment, opportunity cost of the down payment, property taxes, maintenance costs, and outstanding principal on the mortgage. It determines that renting would result in $1,392.72 lower monthly expenditures compared to buying. While buying has some qualitative benefits like ownership and asset appreciation, renting is recommended as the better financial decision for Rebecca based on the numbers.

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    TVM Buy and Rent Decision

    Uploaded by

    Zahid Usman
    7K views4 pages
    This document presents a case study comparing the costs of buying versus renting a home over various time periods. It calculates the monthly mortgage payment, opportunity cost of the down payment, property taxes, maintenance costs, and outstanding principal on the mortgage. It determines that renting would result in $1,392.72 lower monthly expenditures compared to buying. While buying has some qualitative benefits like ownership and asset appreciation, renting is recommended as the better financial decision for Rebecca based on the numbers.

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    TVM BUY AND RENT DECISION

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    This document presents a case study comparing the costs of buying versus renting a home over various time periods. It calculates the monthly mortgage payment, opportunity cost of the down payment, property taxes, maintenance costs, and outstanding principal on the mortgage. It determines that renting would result in $1,392.72 lower monthly expenditures compared to buying. While buying has some qualitative benefits like ownership and asset appreciation, renting is recommended as the better financial decision for Rebecca based on the numbers.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    7K views4 pages

    TVM Buy and Rent Decision

    Uploaded by

    Zahid Usman
    This document presents a case study comparing the costs of buying versus renting a home over various time periods. It calculates the monthly mortgage payment, opportunity cost of the down payment, property taxes, maintenance costs, and outstanding principal on the mortgage. It determines that renting would result in $1,392.72 lower monthly expenditures compared to buying. While buying has some qualitative benefits like ownership and asset appreciation, renting is recommended as the better financial decision for Rebecca based on the numbers.

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    At a glance
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    The case study compares the costs of buying vs renting a property over 25 years. It calculates the monthly mortgage payment, opportunity cost, expenditures for both options and the outstanding principal over different time periods.

    To calculate the monthly mortgage payment, you need to know the effective annual rate, number of payments, actual mortgage amount. Then use the PMT formula in Excel.

    For renting the monthly expenditures are the rent minus the opportunity cost. For buying it's the mortgage payment plus condo fees, taxes and maintenance.

    Case Study 1 - Group 2

    Time Value of Money: The Buy Versus Rent Decision

    Input:
    Asking Sales Price: $620,000
    Final Sales Price: $600,000
    Down Payment (20%): $120,000
    Actual Mortgage: $480,000
    Taxes due today: $18,000
    Closing fees due today: $2,000

    1) Monthly payment for mortgage:

    The number of payments that will occur can be calculated by:


    n = 25 years*12months = 300

    Effective monthly rate:


    In order to get the effective monthly rate, we have to use the formula for the effective annual rate (EAR), which for our case looks at follows:
    0.04
    ( 1+r )6=1+ =¿ r=0.00330589
    2

    As the actual mortgage is $480,000 and will be re-paid over a period of 300 payments.

    Using the Excel formula =pmt(rate,nper,pv,fv), we get the monthly payment of : $2,524.90.

    2) Monthly opportunity cost of funds invested

    Future value of investment:140,000 ×(1+ 0.00330589)300 =376,822.30

    Taking this result gives us the opportunity cost over 25 years by subtracting $140,000 from $376,822.30, which equals $236,822.30.

    To calculate the monthly opportunity cost we use the following excel formula: =pmt(rate,nper,pv,fv), Resulting in $462.82

    Refer excel sheet for further working.


    Case Study 1 - Group 2
    3) Monthly payment Buy vs. rent
    Rent:

    Monthly rent: -$3,000


    +
    Monthly opportunity cost $462.82
    =
    Monthly expenditures: -$2,537.18

    Buy:
    Monthly mortgage payment: -$2,524.90
    +
    Monthly condo fee: -$1,050
    +
    Monthly property tax: -$300
    +
    Monthly Maintenance: -$50
    =
    Monthly expenditures: -$3,929.90

    Facing the buy vs. rent decision the monthly difference is -$1392.72.

    4) Outstanding Principal
    Calculating the FV in Excel:
    =FV(rate,nper,pmt,pv)

    a) After two years


    Rate= .00330589
    nper (number f periods)= 24
    Pmt= 2,524.90
    PV= -480.000

    Resulting in a outstanding principal of $456,609.29


    b) After five years
    Rate= .00330589
    nper (number f periods)= 60
    Pmt= 2,524.90
    PV= -480.000

    Refer excel sheet for further working.

    Resulting in a outstanding principal of $417,858.79


    Case Study 1 - Group 2

    c) After ten years


    Rate= .00330589
    nper (number f periods)= 120
    Pmt= 2,524.90
    PV= -480.000

    Resulting in a outstanding principal of $342,109.0

    5) Determine the “net” future gain or loss

    Table 5.1

    These values indicates the difference between the loss in


    Case Study 1 - Group 2

    Q6 As Rebecca Young, what decision would you make? Describe any qualitative considerations that could factor into your decision.

    Looking at the above projections Rebecca’s best option would be to rent. As seen above the net loss for buying is greater than that of renting. Other qualitative factors that contribute to this decision are;
    Buy
     Satisfaction of owning something            
     Do not have to worry about landlord
     Asset that holds value with time

    Rent
     Less Stress since property damages don’t affect the renter
     Can move location with little hassle
     less financial burden

    Despite the qualitative factors addressed above Rebecca’s best decision would be to choose renting over buying simply because of the clear advantage of both the qualitative and quantitative benefits of renting.

    ../Desktop/BA518 Buy Vs Rent .xlsx

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