Real Estate Investing

a. Should you (or a person with similar expectation to yours) buy or rent a property in the area you explored?b. If you were to buy the average property you considered, what would be your imputed rent? In other words, how much would it costyou per month to live in your own home?c. At what price you would need to purchase the average property in order to be indifferent between buying and renting?d. What is the minimum annual rate of property appreciation on the average property in order to be better off buying than renting?Do you think that this rate of appreciation is reasonable?e. What annual rate of property appreciation should you expect on the average property in order for the imputed rent to be zero?Do you think that this expectation is reasonable?Input VariablesInflation expectation 2.00% Down payment 20%Purchase price $450,000 Loan amount $360,000Initial monthly rent $2,400 Interest rate (Fixed) 4.00%Rental growth rate 2.50% Mortgage initiation fee $3,000Property appreciation 2.50% Loan maturity (years) 30Insurance $6,750 Mortgage Payment $1,718.70Maintenance $4,500 Holding period (years) 6Expense growth 2.50% Selling expenses 6.50%Marginal tax rate 28.00% Invetments opportunity 8.50%Property tax $7,875Option 1: Buy the houseYear 0 1 2 3 4 5 6Out flowsDown payment + Origination $93,000Insurance & Maintenance $11,250 $11,531 $11,820 $12,115 $12,418 $12,728Property tax $7,875 $8,072 $8,274 $8,481 $8,693 $8,910Mortgage payments $20,624 $20,624 $20,624 $20,624 $20,624 $20,624Total: $93,000 $39,749 $40,227 $40,718 $41,220 $41,735 $42,263In flowTax benefits $0 $6,205 $6,187 $6,169 $6,148 $6,126 $6,102Overall “out of pocket” $93,000 $33,545 $34,040 $34,549 $35,072 $35,609$36,160OtherInterest payment $14,285 $14,026 $13,758 $13,478 $13,187 $12,884Principal payments $6,340 $6,598 $6,867 $7,147 $7,438 $7,741House value $450,000 $461,250 $472,781 $484,601 $496,716 $509,134$521,862Total equity $90,000 $107,590 $125,719 $144,405 $163,667 $183,523 $203,992Cash at time sold $203,992Option 2: Rent the houseRent expenses $28,800 $29,520 $30,258 $31,014 $31,790 $32,585Investments portfolio $93,000 $105,650 $119,150 $133,568 $148,979 $165,461$183,101