Question

Rental Costs				Buying Costs
Annual rent	$	8,310		Annual mortgage payments	$	10,550	($9,628 is interest)
Insurance		218		Property taxes		2,000
Security deposit		1,640		Insurance/maintenance		1,980
				Down payment/closing costs		4,500
				Growth in equity		922
				Estimated annual appreciation		2,000

Assume an after-tax savings interest rate of 6 percent and a tax rate of 28 percent.

Answer 1

Step 1: Calculate Total Rental Costs

The value of total rental costs is arrived as below:

Annual Rent	8,310.00
Insurance	218.00
Interest Lost on Security Deposit (1,640*6%)	98.40
Total Rental Costs	$8,626.40

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Step 2: Calculate Total Buying Costs

The value of total buying costs is determined as below:

Annual Mortgage Payments	10,550.00
Taxes, Insurance and Maintenance (2,000 + 1,980)	3,980.00
Interest Lost on Down Payment/Closing Costs (4,500*6%)	270.00
Growth in Equity	-922.00
Estimated Annual Appreciation	-2,000.00
Tax Savings on Mortgage Interest (9,628*28%)	-2,695.84
Tax Savings on Property Taxes (2,000*28%)	-560.00
Total Buying Costs	$8,622.16

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Conclusion:

As the total cost of buying ($8,622.16 or $8,622) is less than the total cost of renting ($8,626.40 or $8,626), the property should be bought.