1. Buying a House vs. a Condominium as a Rental Property Group 2 EGR 403 Section 02 Team Members: Samuel Mebasser Tim Craig Bryan Hannah Michael Lai Henry Phan

2. Scenario 30 Year Old Engineer Making $85K Annually 30 Year Old Engineer Making $85K Annually Planning to Retire at Age 60 Planning to Retire at Age 60 Looking to Invest in Either a House or Condo as a Rental Property Looking to Invest in Either a House or Condo as a Rental Property Looking for a 10% Minimum Attractive Rate of Return Looking for a 10% Minimum Attractive Rate of Return

3. Option #1 – Buying The House 4 Bedroom, 3 Bathroom house located in Pasadena. 4 Bedroom, 3 Bathroom house located in Pasadena. 2,232 Square Feet 2,232 Square Feet 2 Car Garage 2 Car Garage Built in 1979 Built in 1979 Selling Price: $587,000 Selling Price: $587,000 Estimated Appreciation: 8% Annually Estimated Appreciation: 8% Annually

4. Option #2 – Buying The Condo 2 Bedroom, 2 Bathroom Condominium located in Pasadena. 2 Bedroom, 2 Bathroom Condominium located in Pasadena. 1,113 Square Feet 1,113 Square Feet 2 Car Garage 2 Car Garage Built in 1981 Built in 1981 Selling Price: $399,000 Selling Price: $399,000 Estimated Appreciation: 4% Annually Estimated Appreciation: 4% Annually

5. Analysis Parameters HouseCondo Purchase Price $587,000$399,000 Annual Property Value Appreciation 8%4% Maintenance $1050 of Todays Dollars $275 of Todays Dollars Total Non Recurring Costs $12,462.00$9,624.00 Association Dues 0.36% of Property Value

6. Cash Flow Diagram - Home $5,469,240

7. Cash Flow Diagram – Condo $1,249,230

8. Non Recurring Costs Loan Origination Fee Loan Origination Fee Underwriting Fee Underwriting Fee Processing Fee Processing Fee Loan Document Preparation Fee Loan Document Preparation Fee Credit Report Credit Report ALTA Title Policy ALTA Title Policy Tax Service Tax Service Recording Fees Recording Fees Escrow Fee Escrow Fee Loan Tie – In Fee Loan Tie – In Fee Third Party Property Inspection Third Party Property Inspection

9. Additional Costs and Benefits Engineer Receives an annual raise of 5% Engineer Receives an annual raise of 5% Property Taxes are 1.25% of Propertys market value Property Taxes are 1.25% of Propertys market value Insurance is.3% of Propertys market value Insurance is.3% of Propertys market value

10. Monthly Payments On Loan Loan Term is 30 Years with 6.5% Fixed APR Loan Term is 30 Years with 6.5% Fixed APR Down Payment is 20% of Purchase Price, Therefore, Loan covers 80% of the purchase price Down Payment is 20% of Purchase Price, Therefore, Loan covers 80% of the purchase price House House Loan Amount is $469,600 Loan Amount is $469,600 Monthly Payments on 30 year loan are $2968.19 Monthly Payments on 30 year loan are $2968.19 Condo Condo Loan Amount is $319,200 Loan Amount is $319,200 Monthly Payments on 30 Year Loan are $2017.56 Monthly Payments on 30 Year Loan are $2017.56

11. Tax Savings A.G.I. = Rental income – deductions A.G.I. = Rental income – deductions Schedule E deductions Schedule E deductions Insurance costsInsurance costs Auto and travel expensesAuto and travel expenses Management feesManagement fees Mortgage interestMortgage interest RepairsRepairs SuppliesSupplies Property TaxesProperty Taxes Depreciation (MACRS)Depreciation (MACRS) Association fees (Condominium only)Association fees (Condominium only)

12. Sensitivity Analysis Parameters Number of Years Property kept after paid off. Number of Years Property kept after paid off. APR APR Annual Appreciation of Property Annual Appreciation of Property Down Payment Percentage Down Payment Percentage Annual Rent Inflation Rate Annual Rent Inflation Rate Loan Term Loan Term House Monthly Rental House Monthly Rental Condominium Monthly Rental Condominium Monthly Rental

13. Default Sensitivity Analysis Parameters ParameterHouseCondo Number of Years kept after property Paid off 00 APR6.5%6.5% Property Appreciation % 8%4% Down Payment 20%20% Rental Inflation Rate 4%4% Loan Term 30 Years Monthly Rent $3,250$1,950

14. Sensitivity Analysis Number of Years Property kept after paid off. Number of Years Property kept after paid off.

15. Sensitivity Analysis APR APR

16. Sensitivity Analysis Annual Appreciation of Property Annual Appreciation of Property

17. Sensitivity Analysis Down Payment Percentage Down Payment Percentage

18. Sensitivity Analysis Annual Rent Inflation Rate Annual Rent Inflation Rate

19. Sensitivity Analysis Loan Term Loan Term

20. Sensitivity Analysis House Monthly Rental House Monthly Rental

21. Sensitivity Analysis Condominium Monthly Rental Condominium Monthly Rental

22. Lower Interest Rates translate into higher IRR Lower Interest Rates translate into higher IRR Less Down Payment will yield a higher IRR Less Down Payment will yield a higher IRR It is wise to keep the house after it is already paid off, but keeping the condo after it is paid off will decrease the IRR It is wise to keep the house after it is already paid off, but keeping the condo after it is paid off will decrease the IRR If the inflation rate of rent increases at a very high rate (>10%), the condo will eventually have a higher IRR than the house If the inflation rate of rent increases at a very high rate (>10%), the condo will eventually have a higher IRR than the house Sensitivity Analysis Summary

23. Summary Assuming the 30 year, 6.5% APR Loan where the owner sells the house after 30 years with a MARR of 10% The IRR of the house is 13.49% The IRR of the house is 13.49% The IRR of the Condo is 9.52% The IRR of the Condo is 9.52% The Incremental ROR of the two options is 17% The Incremental ROR of the two options is 17% Since the Incremental ROR is larger than the MARR, The higher cost alternative is chosen Since the Incremental ROR is larger than the MARR, The higher cost alternative is chosen Therefore, the Engineer should buy the house for a greater return on his money

24. Resources Jhdcpa.com Jhdcpa.com www.irs.gov www.irs.gov Tarbell Realtors Tarbell Realtors Essentials of Engineering Economic Analysis. Newman, Lavelle, Eschenbach Essentials of Engineering Economic Analysis. Newman, Lavelle, Eschenbach