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Name

Course

Instructor

Date

Case study report –Buy versus rent decision

Introduction

Rebecca young has completed her MBA and she is currently renting a two-bedroom

condominium for $3000 per month. In July 2014 the adjacent identical unit was put under sale

with an asking price of $ 620,000. Rebecca is torn in between moving from renting and owning

her own house. We are going to offer her the best options with using both qualitative and

quantitative reasons.

Background of the case.

Many people in today’s word are in dilemma on the financial ventures and investments to

undertake. A decision to buy an already built house and renting are modern challenges for the

young adults. We are going to focus on both the advantages and disadvantages of renting and

owning an apartment.

A. Monthly payments for the mortgage.

This is calculated as seen in the attached excel sheet.

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Cost 480000
interest rate 4%
Term in years 25
Nper 12
Total number of payments
month 300
Payment per month ($2,533.62)

B. Opportunity cost

Opportunity cost is the forgone benefit when choosing a project. The opportunity cost for the

project is $466.67 as seen below.

Opportunity cost  
Cost 140000
Rate 4%
Nper 12
Intrest per month 466.6666667
Opportunity cost per month 466.6666667

C. Additional payment

The additional payment is derived by factoring in condor fee, property taxes, repairs,

mortgage monthly amount, and the opportunity cost. We less the sum of the above with

the rental fee to get the additional payment.

condor fee 1055

Property taxes 300
Repairs 50
mortgage monthly amount 2533.62
Opportunity cost 466.6666667
  4405.286667
rental fee 3000
Additional cost 1405.286667

D. Principal outstanding

The principal outstanding is derived from the amortization schedule. See attached copy.
 3

Principal outstanding in 2 years 456,712.90

Principal outstanding in 5years 418102.16
Principal outstanding in 10 years 342525.1

E. Present values, loss and gains

i) The condo price remains unchanged.

PV= FV /(1+r)^n

Where

PV is the present value

FV is the future value

r is the interest rate

n is the years.

Then we compute the present value of the principal and deduct from the original

amount to get the net loss or gain.

PV Loss/gain
620,000/(1+0.04)^2 573224.85 -46775.15
-
110,410.3
620000/1.04^5 509,589.62 8
-
620000/1.04^10 418849.86 201150.14

ii) The condo price drops 10 per cent over the next two years, then increases back to

its purchase price by the end of five years, then increases by a total of 10 per cent

from the original purchase price by the end of 10 years.

We get the new principal by compounding the figure using the formula below.

I=PRT

Where,
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P=Principle

R=Rate

T=years

Two years, P= 620,000-(620,000*0.1*2) = 558,000

Five years, Remain 620,000

Ten years, P= 620,000+(620,000*0.1*10) = 682,000

Then we compute the present value of the principal and deduct from the original

amount to get the net loss or gain.

PV Loss/gain
-
558000/1.04^2 515902.3669 104097.63
-
620000/1.04^5 509589.62 110410.38
-
159,265.1
682000/1.04^10 460,734.85 5

iii) The condo price increases annually by the annual rate of inflation of 2 per cent

per year over the next 10 years.

We get the principal by compounding in respect to inflation rate of 2% over the years.

Two years, P= 620,000+(620,000*0.02*2) = 632,400

Five years, P= 620,000+(620,000*0.02*5) = 682,000

Ten years, P= 620,000+(620,000*0.02*10) = 744,000

Then we compute the present value of the principal and deduct from the original

amount to get the net loss or gain.

  PV Loss/gain
-
35301.65
632400/1.04^2 584698.349 1
682000/1.04^5 560,555.62 -
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59,444.38
-
117380.1
744000/1.04^10 502619.8384 6

iv) The condo price increases annually by an annual rate of 5 per cent per year over

the next 10 years.

Two years, P= 620,000+(620,000*0.05*2) = 651,000

Five years, P= 620,000+(620,000*0.05*5) = 775,000

Ten years, P= 620,000+(620,000*0.05*10) = 930,000

Then we compute the present value of the principal and deduct from the original

amount to get the net loss or gain.

  PV Loss/gain
-
18,452.66
651000/1.04^2 601,547.337 3
775,000/1.04^5 636,993.98 16,993.98
930000/1,04^10 628,274.80 8,274.80

F. Decision to be made.

Rebecca Young can either rent or buy the apartment, but if she buys the house she should sell

under the condition that the house value increases by 5% over the ten years. However, if I was

Rebecca I would rather rent the house due to the following advantages.

1. The monthly rent paid in renting an apartment is relatively low than the total amount paid

per month while buying a house. In the scenario of Rebecca Young, the total rent she

was paying per month was $ 3,000 which is low compared to the $4405.29 she will be

paying monthly to own the apartment for 25 years.

2. When renting an apartment, the maintenance charges are passed to the owner unlike

when the house is your property for example in the scenario of Rebecca young she has
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to incur opportunity costs if she decides to buy the house such as the condor fee of $

1055, property taxes of $ 300, repairs and management of $ 50 unlike when renting.

3. It is easy to save money when renting that when you buy a house, this is because you

have to pay a lump sum amount in order to be granted the property unless when you are

just paying the rent alone. In the case of Rebecca, she will have to withdraw a lump sum

of $ 140000 to pay for the down payment of the property-

4. When renting you do not need a lawyer and a financial consultant to advice you on how

to get best deals and paperwork. In the case of Rebecca young she will need to hire a

lawyer to help her with paperwork unlike when she was renting-

5. Another advantage of renting an apartment is the fact that you do not need to apply for a

mortgage since you can pay your rental money monthly. In Rebecca’s case she has to

take a mortgage to finance the house which attracts high interests.

Exhibits
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cost 480000  
intrest rate 4%  
Term in years 25  
Nper 12  
Total number of payments
month 300  
Payment per month ($2,533.62)  
     
Opportunity cost    
Cost 140000  
Rate 4%  
nper 12  
Intrest per month 466.6666667  
Opportunity cost per month 466.6666667  
     
     
condor fee 1055  
Property taxes 300  
repairs 50  
mortage monthly amount 2533.62  
Opportunity cost 466.6666667  
  4405.286667  
rental fee 3000  
Additional cost 1405.286667  
     
Question D    
Principal outstanding in 2 years 456,712.90 23,287.10
Principal outstanding in 5years 418102.16 61897.84
Principal outstanding in 10
years 342525.1 137474.9
     
Question E.    
620000    
PV=FV/(1+R)n    
PV Loss/gain
620,000/(1+0.04)^2 573224.85 -46775.15
-
110,410.3
620000/1.04^5 509,589.62 8
-
620000/1.04^10 418849.86 201150.14
  PV Loss/gain
-
558000/1.04^2 515902.3669 104097.63
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-
620000/1.04^5 509589.62 110410.38
-
159,265.1
682000/1.04^10 460,734.85 5
  PV Loss/gain
-
632400/1.04^2 584698.349 35301.651
682000/1.04^5 560,555.62 -59,444.38
-
744000/1.04^10 502619.8384 117380.16
  PV Loss/gain
-
18,452.66
651000/1.04^2 601,547.337 3
775,000/1.04^5 636,993.98 16,993.98
930000/1,04^10 628,274.80 8,274.80

Amortization Table

RATE 4%
Loan
tear 25
payments per
year 12
amou
nt 480000

period payment intrest principal balance

($2,533.6 ($1,600.0 $479,066.
1 2) 0) ($933.62) 38
($2,533.6 ($1,596.8 $478,129.
2 2) 9) ($936.73) 65
($2,533.6 ($1,593.7 $477,189.
3 2) 7) ($939.85) 80
($2,533.6 ($1,590.6 $476,246.
4 2) 3) ($942.98) 82
($2,533.6 ($1,587.4 $475,300.
5 2) 9) ($946.13) 69
($2,533.6 ($1,584.3 $474,351.
6 2) 4) ($949.28) 41
($2,533.6 ($1,581.1 $473,398.
7 2) 7) ($952.45) 96
($2,533.6 ($1,578.0 $472,443.
8 2) 0) ($955.62) 34
($2,533.6 ($1,574.8 $471,484.
9 2) 1) ($958.81) 54
10 ($2,533.6 ($1,571.6 ($962.00) $470,522.
 9

2) 2) 54
($2,533.6 ($1,568.4 $469,557.
11 2) 1) ($965.21) 33
($2,533.6 ($1,565.1 $468,588.
12 2) 9) ($968.43) 90
($2,533.6 ($1,561.9 $467,617.
13 2) 6) ($971.65) 25
($2,533.6 ($1,558.7 $466,642.
14 2) 2) ($974.89) 36
($2,533.6 ($1,555.4 $465,664.
15 2) 7) ($978.14) 21
($2,533.6 ($1,552.2 $464,682.
16 2) 1) ($981.40) 81
($2,533.6 ($1,548.9 $463,698.
17 2) 4) ($984.67) 14
($2,533.6 ($1,545.6 $462,710.
18 2) 6) ($987.96) 18
($2,533.6 ($1,542.3 $461,718.
19 2) 7) ($991.25) 93
($2,533.6 ($1,539.0 $460,724.
20 2) 6) ($994.55) 38
($2,533.6 ($1,535.7 $459,726.
21 2) 5) ($997.87) 51
($2,533.6 ($1,532.4 ($1,001.2 $458,725.
22 2) 2) 0) 31
($2,533.6 ($1,529.0 ($1,004.5 $457,720.
23 2) 8) 3) 78
($2,533.6 ($1,525.7 ($1,007.8 $456,712.
24 2) 4) 8) 90
($2,533.6 ($1,522.3 ($1,011.2 $455,701.
25 2) 8) 4) 66
($2,533.6 ($1,519.0 ($1,014.6 $454,687.
26 2) 1) 1) 05
($2,533.6 ($1,515.6 ($1,017.9 $453,669.
27 2) 2) 9) 05
($2,533.6 ($1,512.2 ($1,021.3 $452,647.
28 2) 3) 9) 67
($2,533.6 ($1,508.8 ($1,024.7 $451,622.
29 2) 3) 9) 88
($2,533.6 ($1,505.4 ($1,028.2 $450,594.
30 2) 1) 1) 67
($2,533.6 ($1,501.9 ($1,031.6 $449,563.
31 2) 8) 3) 04
($2,533.6 ($1,498.5 ($1,035.0 $448,527.
32 2) 4) 7) 96
($2,533.6 ($1,495.0 ($1,038.5 $447,489.
33 2) 9) 2) 44
($2,533.6 ($1,491.6 ($1,041.9 $446,447.
34 2) 3) 9) 45
($2,533.6 ($1,488.1 ($1,045.4 $445,401.
35 2) 6) 6) 99
 10

($2,533.6 ($1,484.6 ($1,048.9 $444,353.

36 2) 7) 4) 05
($2,533.6 ($1,481.1 ($1,052.4 $443,300.
37 2) 8) 4) 61
($2,533.6 ($1,477.6 ($1,055.9 $442,244.
38 2) 7) 5) 66
($2,533.6 ($1,474.1 ($1,059.4 $441,185.
39 2) 5) 7) 19
($2,533.6 ($1,470.6 ($1,063.0 $440,122.
40 2) 2) 0) 20
($2,533.6 ($1,467.0 ($1,066.5 $439,055.
41 2) 7) 4) 65
($2,533.6 ($1,463.5 ($1,070.1 $437,985.
42 2) 2) 0) 55
($2,533.6 ($1,459.9 ($1,073.6 $436,911.
43 2) 5) 6) 89
($2,533.6 ($1,456.3 ($1,077.2 $435,834.
44 2) 7) 4) 65
($2,533.6 ($1,452.7 ($1,080.8 $434,753.
45 2) 8) 3) 81
($2,533.6 ($1,449.1 ($1,084.4 $433,669.
46 2) 8) 4) 37
($2,533.6 ($1,445.5 ($1,088.0 $432,581.
47 2) 6) 5) 32
($2,533.6 ($1,441.9 ($1,091.6 $431,489.
48 2) 4) 8) 64
($2,533.6 ($1,438.3 ($1,095.3 $430,394.
49 2) 0) 2) 32
($2,533.6 ($1,434.6 ($1,098.9 $429,295.
50 2) 5) 7) 35
($2,533.6 ($1,430.9 ($1,102.6 $428,192.
51 2) 8) 3) 72
($2,533.6 ($1,427.3 ($1,106.3 $427,086.
52 2) 1) 1) 41
($2,533.6 ($1,423.6 ($1,110.0 $425,976.
53 2) 2) 0) 42
($2,533.6 ($1,419.9 ($1,113.7 $424,862.
54 2) 2) 0) 72
($2,533.6 ($1,416.2 ($1,117.4 $423,745.
55 2) 1) 1) 32
($2,533.6 ($1,412.4 ($1,121.1 $422,624.
56 2) 8) 3) 18
($2,533.6 ($1,408.7 ($1,124.8 $421,499.
57 2) 5) 7) 31
($2,533.6 ($1,405.0 ($1,128.6 $420,370.
58 2) 0) 2) 69
($2,533.6 ($1,401.2 ($1,132.3 $419,238.
59 2) 4) 8) 31
($2,533.6 ($1,397.4 ($1,136.1 $418,102.
60 2) 6) 6) 16
61 ($2,533.6 ($1,393.6 ($1,139.9 $416,962.
 11

2) 7) 4) 21
($2,533.6 ($1,389.8 ($1,143.7 $415,818.
62 2) 7) 4) 47
($2,533.6 ($1,386.0 ($1,147.5 $414,670.
63 2) 6) 6) 92
($2,533.6 ($1,382.2 ($1,151.3 $413,519.
64 2) 4) 8) 54
($2,533.6 ($1,378.4 ($1,155.2 $412,364.
65 2) 0) 2) 32
($2,533.6 ($1,374.5 ($1,159.0 $411,205.
66 2) 5) 7) 25
($2,533.6 ($1,370.6 ($1,162.9 $410,042.
67 2) 8) 3) 32
($2,533.6 ($1,366.8 ($1,166.8 $408,875.
68 2) 1) 1) 51
($2,533.6 ($1,362.9 ($1,170.7 $407,704.
69 2) 2) 0) 81
($2,533.6 ($1,359.0 ($1,174.6 $406,530.
70 2) 2) 0) 21
($2,533.6 ($1,355.1 ($1,178.5 $405,351.
71 2) 0) 2) 69
($2,533.6 ($1,351.1 ($1,182.4 $404,169.
72 2) 7) 4) 25
($2,533.6 ($1,347.2 ($1,186.3 $402,982.
73 2) 3) 9) 86
($2,533.6 ($1,343.2 ($1,190.3 $401,792.
74 2) 8) 4) 52
($2,533.6 ($1,339.3 ($1,194.3 $400,598.
75 2) 1) 1) 21
($2,533.6 ($1,335.3 ($1,198.2 $399,399.
76 2) 3) 9) 92
($2,533.6 ($1,331.3 ($1,202.2 $398,197.
77 2) 3) 8) 64
($2,533.6 ($1,327.3 ($1,206.2 $396,991.
78 2) 3) 9) 35
($2,533.6 ($1,323.3 ($1,210.3 $395,781.
79 2) 0) 1) 04
($2,533.6 ($1,319.2 ($1,214.3 $394,566.
80 2) 7) 5) 69
($2,533.6 ($1,315.2 ($1,218.3 $393,348.
81 2) 2) 9) 29
($2,533.6 ($1,311.1 ($1,222.4 $392,125.
82 2) 6) 6) 84
($2,533.6 ($1,307.0 ($1,226.5 $390,899.
83 2) 9) 3) 31
($2,533.6 ($1,303.0 ($1,230.6 $389,668.
84 2) 0) 2) 69
($2,533.6 ($1,298.9 ($1,234.7 $388,433.
85 2) 0) 2) 97
($2,533.6 ($1,294.7 ($1,238.8 $387,195.
86 2) 8) 4) 13
 12

($2,533.6 ($1,290.6 ($1,242.9 $385,952.

87 2) 5) 7) 16
($2,533.6 ($1,286.5 ($1,247.1 $384,705.
88 2) 1) 1) 05
($2,533.6 ($1,282.3 ($1,251.2 $383,453.
89 2) 5) 7) 79
($2,533.6 ($1,278.1 ($1,255.4 $382,198.
90 2) 8) 4) 35
($2,533.6 ($1,273.9 ($1,259.6 $380,938.
91 2) 9) 2) 73
($2,533.6 ($1,269.8 ($1,263.8 $379,674.
92 2) 0) 2) 91
($2,533.6 ($1,265.5 ($1,268.0 $378,406.
93 2) 8) 3) 87
($2,533.6 ($1,261.3 ($1,272.2 $377,134.
94 2) 6) 6) 61
($2,533.6 ($1,257.1 ($1,276.5 $375,858.
95 2) 2) 0) 11
($2,533.6 ($1,252.8 ($1,280.7 $374,577.
96 2) 6) 6) 35
($2,533.6 ($1,248.5 ($1,285.0 $373,292.
97 2) 9) 3) 33
($2,533.6 ($1,244.3 ($1,289.3 $372,003.
98 2) 1) 1) 02
($2,533.6 ($1,240.0 ($1,293.6 $370,709.
99 2) 1) 1) 41
($2,533.6 ($1,235.7 ($1,297.9 $369,411.
100 2) 0) 2) 49
($2,533.6 ($1,231.3 ($1,302.2 $368,109.
101 2) 7) 5) 25
($2,533.6 ($1,227.0 ($1,306.5 $366,802.
102 2) 3) 9) 66
($2,533.6 ($1,222.6 ($1,310.9 $365,491.
103 2) 8) 4) 72
($2,533.6 ($1,218.3 ($1,315.3 $364,176.
104 2) 1) 1) 41
($2,533.6 ($1,213.9 ($1,319.7 $362,856.
105 2) 2) 0) 71
($2,533.6 ($1,209.5 ($1,324.0 $361,532.
106 2) 2) 9) 62
($2,533.6 ($1,205.1 ($1,328.5 $360,204.
107 2) 1) 1) 11
($2,533.6 ($1,200.6 ($1,332.9 $358,871.
108 2) 8) 4) 18
($2,533.6 ($1,196.2 ($1,337.3 $357,533.
109 2) 4) 8) 80
($2,533.6 ($1,191.7 ($1,341.8 $356,191.
110 2) 8) 4) 96
($2,533.6 ($1,187.3 ($1,346.3 $354,845.
111 2) 1) 1) 65
112 ($2,533.6 ($1,182.8 ($1,350.8 $353,494.
 13

2) 2) 0) 85
($2,533.6 ($1,178.3 ($1,355.3 $352,139.
113 2) 2) 0) 55
($2,533.6 ($1,173.8 ($1,359.8 $350,779.
114 2) 0) 2) 73
($2,533.6 ($1,169.2 ($1,364.3 $349,415.
115 2) 7) 5) 38
($2,533.6 ($1,164.7 ($1,368.9 $348,046.
116 2) 2) 0) 48
($2,533.6 ($1,160.1 ($1,373.4 $346,673.
117 2) 5) 6) 02
($2,533.6 ($1,155.5 ($1,378.0 $345,294.
118 2) 8) 4) 98
($2,533.6 ($1,150.9 ($1,382.6 $343,912.
119 2) 8) 3) 35
($2,533.6 ($1,146.3 ($1,387.2 $342,525.
120 2) 7) 4) 10
($2,533.6 ($1,141.7 ($1,391.8 $341,133.
121 2) 5) 7) 24
($2,533.6 ($1,137.1 ($1,396.5 $339,736.
122 2) 1) 1) 73