Question 2. Rent vs. Buy using Future Value Cash Flows

Assume that you were going to buy a house this year and you have saved a down payment of 25% of the purchase price. The purchase price of the house is $250,000, interest is 5% and amortizing it over 25 years, your monthly mortgage payment is $1,100 per month. Annual maintenance costs and property taxes total $5,000 per year. In 25 years the property will appreciate 2% per year. If you were to rent a similar property it would cost $2,000 per month. Annual rent increases are 1% per year. Investing the foregone down payment in the renting option would allow you to earn 5% on your initial investment.

Required:

a) Identify at least 5 cost drivers that you believe would impact and have to be considered in each of the buying and renting process.

b) Do an analysis and quantify whether you would be better off purchasing a house this year and selling the house in 25 years or renting for the duration.

c) Which choice would result in the your amassing the greatest amount of wealth and by how much?