a. According to the assumptions made in that spreadsheet, should the average individual buy or rent? Briefly explain.

b. Calculate the maximum price that an investor with the assumptions made in the model should be willing to pay for that property. Show this maximum price in cell C8.

cIf you expect a general increase in the risk premium for real estate investments over the next 8 years, how would this affect the expected levered return on this property? Briefly Explain.

Input Variables Inflation expectation 2.00% Down payment 30% Purchase price $230,000 Loan amount $161,000 Initial monthly rent 51,800 Interest rate (Fixed) 4.00 Rental growth rate 2.00% Mortgage initiation fee $3,000 Property appreciation 2.00% Loan maturity (years) 30 Insurance $3,450 Mortgage Payment $768.64 Maintenance $2,300 Holding period (years) Expense growth 2.00%% Selling expenses 6.50% Marginal tax rate 25.00% Invetments opportunity 8.50% Property tax 54,025 Option 1: Buy the house Year 1 2 3 51 Out flows Down payment + Origination $72,000 Insurance & Maintenance $5,750 $5,865 $5,982 $6,102 $6,224 Property tax $4,025 $4,106 54,188 54,271 54,357 Mortgage payments 59,224 $9,224 59,224 59,224 59,224 Total: $72,000 $18,999 $19,194 $19,394 $19,597 $19,804 In flow Tax benefits 50 $2,603 $2,595 $2,585 $2,575 $2,564 Overall "out of pocket" $72,000 $16,395 $16,600 $16,809 $17,022 $17,241 Other Interest payment 56,388 56,273 $6,153 56,028 $5,897 Principal payments $2,835 $2,951 $3,071 53,196 53,326 House value $230,000 $234,600 $239,292 5244,078 $248,959 5253,939 Total equity $69,000 $76,435 584,078 $91,935 $100,013 $108,318 Cash at time sold 591,812 Option 2: Rent the house Rent expenses $21,600 522,032 $22,473 $22,922 $23,381 Investments portfolio $72,000 $72,915 $73,681 $74,279 $74,693 $74,903