Buy vs Lease a Home EGR 403 Summer

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Buy vs. Lease a Home EGR 403, Summer 2004, Team 10 l. Jeffrey Scheinost – Organizer l. Stephen Casey – “Techie” l. Omabamid Odubela – Summarizer l. Mohammad Fazil – “Techie”

Introduction l Buying vs. Leasing a home – Analysis Considerations Buyer/Leaser- combined household income $90, 000 l Invests 10% annually l Assume taxes are constant 25% l Can have money for down payment l

Scenario 1 - Buy l l l Condominium in Glendale Priced at $370, 000 1245 s. f. , 3 bedroom, 2. 5 bath Puts 20% down Fixed Mortgage – 6. 5% A. P. R. Lender: American Home Loans – 30 Year Loan Maintenance costs increased with inflation l Present Worth Analysis l

Scenario 2 - Buy Condominium in Glendale l Priced at $370, 000 l 1245 s. f. , 3 bedroom, 2. 5 bath l 95% Financed w/ Private Mortgage Insurance l – $196/month until 20% of the original value of the house is paid Fixed Mortgage – 6. 5% A. P. R. Lender: American Home Loans – 30 Year Loan l 30 year loan l Maintenance costs increased with inflation l Present Worth Analysis l

Scenario 3 - Lease l Apartment located in Glendale CA l 1250 s. f. 3 bedroom, 2 bath l Rental price of $1, 700 per month ($500 Security Deposit) l Annual rent increase of 3. 5% l No Maintenance costs involved l Present Worth Analysis

Scenario 1 Results l Benefits: Income tax savings – Deduct interest from Adjusted Gross Income l Costs – – l Property Taxes ~2% the value of the home Homeowners insurance ~ 1% the value of the home House payment Maintenance Salvage value after 30 years: $1, 200, 057. 08 – Average increase of 4% over 30 years l Net Present Worth: ($392, 883. 05)

Scenario 2 Results l Benefits: Income tax savings – Deduct interest from Adjusted Gross Income l Costs – – – Property Taxes ~2% the value of the home Homeowners insurance ~1% the value of the home House payment Maintenance PMI For first 9 years of loan $195/month Salvage value after 30 years: ? ? ? l Net Present Worth: ($405, 321. 28) l

Scenario 3 Results Benefit: $2, 500 per year standard income tax deduction l Costs: l – Renter’s Insurance (Minimal, not included) l Intangible Benefit: – No Maintenance – Easy to move – Lower Annual Cost l Net Present Value: ($779, 841. 95)

Scenario Comparison Scenario Net Present Worth Buying a home 20% down -$392, 883. 05 Buying a home 5% down -$405, 321. 28 Leasing -$779, 841. 95

Sensitivity to inflation l Scenario 1&2 – Increased maintenance cost – PMI and house payment remain constant – Property tax remains constant assuming inflation does not effect the housing market l Scenario 3 – Rent would remain constant assuming inflation does not effect the rental market

Sensitivity to inflation

Sensitivity to Housing Market l Scenario 1&2 – Effects property tax and homeowners insurance – Effects salvage value of the house l Scenario 3 – This scenario is not effected assuming the rental market is not effected by the housing market.

Sensitivity to Housing Market

Sensitivity to rental market l Scenario 1&2 – Not effected by rental market l Scenario 3 – Rent paid is effected.

Sensitivity to rental market

Conclusions l Scenario 1 is almost always preferable – Unless inflation greatly exceeds rental increase l Owning a home builds equity l Paying rent builds no equity l In 30 years the house has value while the apartment is owned by the landlord l Inflation does not effect the choice between the 3 scenarios

Sources l American Home Loans l Washington Mutual l U. S. Census Bureau l U. S. Department of Housing & Urban Development l Silicon Valley Business Journal l Rentnet. com

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