Buy vs. Lease a Home

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

2. 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

3. 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

4. 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

5. 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

6. 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)

7. 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)

8. 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)

9. Scenario Comparison

10. 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

11. Sensitivity to inflation

12. 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.

13. Sensitivity to Housing Market

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

15. Sensitivity to rental market

16. 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

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