Question

Scenario 3

Chris and Jane had a job in Raleigh but knew that they would be moving to a new city every 6 years. They were trying to decide whether to buy a house or rent a house for the next 6 years. If they bought a house, they knew they could afford a $400,000 home, after a down payment of $80,000 and closing costs of 4% of the cost of the house. The $320,000 would be at an interest rate of 6%, but they would also need to add in $5,000 a year of property taxes, and $1,200 a year for homeowners insurance. They estimate that monthly maintenance (air conditioner, lawn service, light bulbs, etc.) would cost $400 a month. They would also need to budget for an additional $100 a month in utilities that are a direct result of home ownership. They anticipate that the house will appreciate by 10% in 6 years but they will have to pay real estate brokers fees and other costs of sale equal to 7% of the sale price.

If they rent a house, they knew they could find a great rental property for $2,400 a month. They would need to pay a security deposit of $3,000. The rental price will increase by 3% per year over the 6 years. They would also need renters insurance of $125 a month. All other maintenance costs are covered by landlord. All other utilities are the same whether they buy or rent.

Should Chris and Jane buy or rent? Explain your answer?

Answer 1

If chris And Jane Buy The House Then The Total Outflow Of Funds Are As Follows :

Particulars Amount($)

Cost Of The House (This is Irrelevant for Decision)   400000

Down Payment (This is Irrelevant for Decision)   80000

   Closing Costs (400000*4%) 16000

Interest Cost (320000*6%*6years) 115200

Property Taxes (5000*6years)    30000

Home Owners Insurance (1200*6years)   7200

Monthly Maintenance (400pm*12months*6years)    28800

Additional Utilities (100pm*12months*6years) 7200

Broker Fees And Other Costs (400000*7%)    28000

Total 232400

If chris And Jane Rent The House Then The Total Outflow Of Funds Are As Follows :

Particulars Amount($)

Rental Charges For 1st Year(2400pm*12months) 28800

Rental Charges For 2nd Year(2400pm*12months*103%) 29664

Rental Charges For 3rd Year(2472pm*103%*12months ) 30554

Rental Charges For 4th Year(2546.16pm*103%*12months)   31470

Rental Charges For 5th Year(2622pm*103%*12months)    32415

Rental Charges For 6th Year(2700pm*103%*12months) 33372

Security Deposit   3000

Rental Insurance (125pm*12months*6years) 9000

Total 198275

Decision: Cost Of Renting The House Is Less Than Buying The House.

So Chris And Jane Taking Rent House For 6 Years Period.