Buy vs. Lease a Home
EGR 403, Summer 2004, Team 10
Scheinost – Organizer Stephen Casey – “Techie” Omabamid Odubela – Summarizer Mohammad Fazil – “Techie”
Jeffrey
Introduction
Buying vs. Leasing a home
– Analysis Considerations Buyer/Leaser- combined household income $90,000 Invests 10% annually Assume taxes are constant 25% Can have money for down payment
Scenario 1- Buy
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 Present Worth Analysis
Scenario 2- Buy
Condominium in Glendale Priced at $370,000 1245 s.f., 3 bedroom, 2.5 bath 95% Financed w/ Private Mortgage Insurance
– $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 30 year loan Maintenance costs increased with inflation Present Worth Analysis
Scenario 3 - Lease
Apartment located in Glendale CA 1250 s.f. 3 bedroom, 2 bath Rental price of $1,700 per month ($500 Security Deposit) Annual rent increase of 3.5% No Maintenance costs involved Present Worth Analysis
Scenario 1 Results
Benefits: Income tax savings
– Deduct interest from Adjusted Gross Income
Costs
– – – –
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
Net Present Worth: ($392,883.05)
Scenario 2 Results
Benefits: Income tax savings
– Deduct interest from Adjusted Gross Income
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: ??? Net Present Worth: ($405,321.28)
Scenario 3 Results
Benefit: $2,500 per year standard income tax deduction Costs:
– Rent – Renter’s Insurance (Minimal, not included)
Intangible Benefit:
– No Maintenance – Easy to move – Lower Annual Cost
Net Present Value: ($779,841.95)
Scenario Comparison
Scenario
Buying a home 20% down Buying a home 5% down
Net Present Worth
-$392,883.05 -$405,321.28
Leasing
-$779,841.95
Sensitivity to inflation
Scenario 1 & 2
– Increased maintenance cost – PMI and house payment remain constant – Property tax remains constant assuming
inflation does not effect the housing market
Scenario 3
– Rent would remain constant assuming inflation
does not effect the rental market
Sensitivity to inflation
$0.00 ($100,000.00) ($200,000.00) ($300,000.00) ($400,000.00) ($500,000.00) ($600,000.00) ($700,000.00) ($800,000.00) ($900,000.00)
Scen. 1 Scen.2 Scen 3.
1
2
3
4
5
6
7
8
9
Sensitivity to Housing Market
Scenario 1 & 2
– Effects property tax and homeowners insurance – Effects salvage value of the house
Scenario 3
– This scenario is not effected assuming the
rental market is not effected by the housing market.
Sensitivity to Housing Market
$0.00 ($100,000.00) 0% ($200,000.00) ($300,000.00) ($400,000.00) ($500,000.00) ($600,000.00) ($700,000.00) ($800,000.00) ($900,000.00) Scen. 1 Scen.2 Scen 3. 2% 4% 6% 8%
Sensitivity to rental market
Scenario 1 & 2
– Not effected by rental market
Scenario 3
– Rent paid is effected.
Sensitivity to rental market
$0.00 0.00% 2.00% 4.00% 6.00% 8.00% 10.00 12.00 ($200,000.00) % % ($400,000.00) ($600,000.00) ($800,000.00) ($1,000,000.00) ($1,200,000.00) ($1,400,000.00) ($1,600,000.00) ($1,800,000.00) Scen. 1 Scen.2 Scen 3.
Conclusions
Scenario 1 is almost always preferable
– Unless inflation greatly exceeds rental increase
Owning a home builds equity Paying rent builds no equity In 30 years the house has value while the apartment is owned by the landlord Inflation does not effect the choice between the 3 scenarios
Sources
American Home Loans Washington Mutual U.S. Census Bureau U.S. Department of Housing & Urban Development Silicon Valley Business Journal Rentnet.com