Buying a House vs. a Condominium as a Rental Property

Buying a House vs. a Condominium as a Rental Property Group 2 EGR 403 Section 02 Team Members: Samuel Mebasser Tim Craig Bryan Hannah Michael Lai Henry Phan

Scenario • 30 Year Old Engineer Making $85K Annually • Planning to Retire at Age 60 • Looking to Invest in Either a House or Condo as a Rental Property • Looking for a 10% Minimum Attractive Rate of Return

Option #1 – Buying The House • 4 Bedroom, 3 Bathroom house located in Pasadena. • 2,232 Square Feet • 2 Car Garage • Built in 1979 • Selling Price: $587,000 • Estimated Appreciation: 8% Annually

Option #2 – Buying The Condo • 2 Bedroom, 2 Bathroom Condominium located in Pasadena. • 1,113 Square Feet • 2 Car Garage • Built in 1981 • Selling Price: $399,000 • Estimated Appreciation: 4% Annually

Analysis Parameters

Cash Flow Diagram - Home $5,469,240

Cash Flow Diagram – Condo $1,249,230

Non Recurring Costs • Loan Origination Fee • Underwriting Fee • Processing Fee • Loan Document Preparation Fee • Credit Report • ALTA Title Policy • Tax Service • Recording Fees • Escrow Fee • Loan Tie – In Fee • Third Party Property Inspection

Engineer Receives an annual raise of 5% Property Taxes are 1.25% of Property’s market value Insurance is .3% of Property’s market value Additional Costs and Benefits

Monthly Payments On Loan • Loan Term is 30 Years with 6.5% Fixed APR • Down Payment is 20% of Purchase Price, Therefore, Loan covers 80% of the purchase price House • Loan Amount is $469,600 • Monthly Payments on 30 year loan are $2968.19 Condo • Loan Amount is $319,200 • Monthly Payments on 30 Year Loan are $2017.56

Tax Savings • A.G.I. = Rental income – deductions • Schedule E deductions • Insurance costs • Auto and travel expenses • Management fees • Mortgage interest • Repairs • Supplies • Property Taxes • Depreciation (MACRS) • Association fees (Condominium only)

Number of Years Property kept after paid off. APR Annual Appreciation of Property Down Payment Percentage Annual Rent Inflation Rate Loan Term House Monthly Rental Condominium Monthly Rental Sensitivity Analysis Parameters

Default Sensitivity Analysis Parameters

Sensitivity Analysis • Number of Years Property kept after paid off.

Sensitivity Analysis • APR

Sensitivity Analysis • Annual Appreciation of Property

Sensitivity Analysis • Down Payment Percentage

Sensitivity Analysis • Annual Rent Inflation Rate

Sensitivity Analysis • Loan Term

Sensitivity Analysis • House Monthly Rental

Sensitivity Analysis • Condominium Monthly Rental

Sensitivity Analysis Summary • Lower Interest Rates translate into higher IRR • Less Down Payment will yield a higher IRR • It is wise to keep the house after it is already paid off, but keeping the condo after it is paid off will decrease the IRR • If the inflation rate of rent increases at a very high rate (>10%), the condo will eventually have a higher IRR than the house

Summary Assuming the 30 year, 6.5% APR Loan where the owner sells the house after 30 years with a MARR of 10% • The IRR of the house is 13.49% • The IRR of the Condo is 9.52% • The Incremental ROR of the two options is 17% • Since the Incremental ROR is larger than the MARR, The higher cost alternative is chosen Therefore, the Engineer should buy the house for a greater return on his money

Resources • Jhdcpa.com • www.irs.gov • Tarbell Realtors • Essentials of Engineering Economic Analysis. Newman, Lavelle, Eschenbach

Buying a House vs. a Condominium as a Rental Property