compare the costs of owning a home against renting a home. Assume a home can be purchased for $180,000 with a $45,000 down payment and financed with a fully amortizing mortgage loan of $135,000 at 6.5 percent interest for 30 years. Other costs associated with owning include annual maintenance (initial cost of $750), insurance (initial cost of $1,600), and property taxes (initial cost of 2.5 percent of property value). These expenses would not need to be paid if renting. Assume that growth rates for expenses (including insurance, maintenance, and property taxes) equal to 2 percent per year. Assume the property value will grow at a rate of a constant 2 percent per year. After six years, the property will be sold. A selling expense of 7 percent would have to be paid at that time. Assume the income tax rate is 24 percent. Alternatively, assume the home can be rented for $15,000 for the first year, with an annual 2 percent growth rate in rent. 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. Please refer for Exhibits 7-2 and 7-3 for sample calculations. In your report, identify and explain the net cash flow in each year, for owning relative to renting. If an annual after-tax return of 15 percent is available on an investment of comparable risk, which is the better option, owning or renting? Part 1: Property and Loan Information Fill in the table for the property information. Fill in the table for the loan information. Apply the Excel PMT function to calculate the monthly payment. Formulae: Interest = Beginning loan balance * Periodic rate Amortization = Monthly payment – Interest Ending loan balance = Beginning loan balance – Amortization
Rent versus Own Analysis
compare the costs of owning a home against renting a home. Assume a home can be purchased for $180,000 with a $45,000 down payment and financed with a fully amortizing mortgage loan of $135,000 at 6.5 percent interest for 30 years. Other costs associated with owning include annual maintenance (initial cost of $750), insurance (initial cost of $1,600), and property taxes (initial cost of 2.5 percent of property value). These expenses would not need to be paid if renting. Assume that growth rates for expenses (including insurance, maintenance, and property taxes) equal to 2 percent per year. Assume the property value will grow at a rate of a constant 2 percent per year. After six years, the property will be sold. A selling expense of 7 percent would have to be paid at that time. Assume the income tax rate is 24 percent. Alternatively, assume the home can be rented for $15,000 for the first year, with an annual 2 percent growth rate in rent.
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. Please refer for Exhibits 7-2 and 7-3 for sample calculations. In your report, identify and explain the net cash flow in each year, for owning relative to renting. If an annual after-tax return of 15 percent is available on an investment of comparable risk, which is the better option, owning or renting?
Part 1: Property and Loan Information
- Fill in the table for the property information.
- Fill in the table for the loan information. Apply the Excel PMT function to calculate the monthly payment.
Formulae: Interest = Beginning loan balance * Periodic rate
Amortization = Monthly payment – Interest
Ending loan balance = Beginning loan balance – Amortization
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