1. Buy vs. Lease a Home Jeffrey Scheinost – Organizer Stephen Casey – “Techie” Omabamid Odubela – Summarizer Mohammad Fazil – “Techie” EGR 403, Summer 2004, Team 10

2. Introduction Buying vs. Leasing a home – Analysis Considerations Buyer/Leaser- combined household income $90,000 Invests 10% annually Assume taxes are constant 25% Can have money for down payment

3. Scenario 1- Buy Condominium in Glendale Priced at $370,000 1245 s.f., 3 bedroom, 2.5 bath Puts 20% down Fixed Mortgage – 6.5% A.P.R. Lender: American Home Loans – 30 Year Loan Maintenance costs increased with inflation Present Worth Analysis

4. Scenario 2- Buy Condominium in Glendale Priced at $370,000 1245 s.f., 3 bedroom, 2.5 bath 95% Financed w/ Private Mortgage Insurance – $196/month until 20% of the original value of the house is paid Fixed Mortgage – 6.5% A.P.R. Lender: American Home Loans – 30 Year Loan 30 year loan Maintenance costs increased with inflation Present Worth Analysis

5. Scenario 3 - Lease Apartment located in Glendale CA 1250 s.f. 3 bedroom, 2 bath Rental price of $1,700 per month ($500 Security Deposit) Annual rent increase of 3.5% No Maintenance costs involved Present Worth Analysis

6. Scenario 1 Results Benefits: Income tax savings – Deduct interest from Adjusted Gross Income Costs – Property Taxes ~2% the value of the home – Homeowners insurance ~ 1% the value of the home – House payment – Maintenance Salvage value after 30 years: $1,200,057.08 – Average increase of 4% over 30 years Net Present Worth: ($392,883.05)

7. Scenario 2 Results Benefits: Income tax savings – Deduct interest from Adjusted Gross Income Costs – Property Taxes ~2% the value of the home – Homeowners insurance ~1% the value of the home – House payment – Maintenance – PMI For first 9 years of loan $195/month Salvage value after 30 years: ??? Net Present Worth: ($405,321.28)

8. Scenario 3 Results Benefit: $2,500 per year standard income tax deduction Costs: – Rent – Renter’s Insurance (Minimal, not included) Intangible Benefit: – No Maintenance – Easy to move – Lower Annual Cost Net Present Value: ($779,841.95)

9. Scenario Comparison ScenarioNet Present Worth Buying a home 20% down -$392,883.05 Buying a home 5% down-$405,321.28 Leasing-$779,841.95

10. Sensitivity to inflation Scenario 1 & 2 – Increased maintenance cost – PMI and house payment remain constant – Property tax remains constant assuming inflation does not effect the housing market Scenario 3 – Rent would remain constant assuming inflation does not effect the rental market

11. Sensitivity to inflation

12. Sensitivity to Housing Market Scenario 1 & 2 – Effects property tax and homeowners insurance – Effects salvage value of the house Scenario 3 – This scenario is not effected assuming the rental market is not effected by the housing market.

13. Sensitivity to Housing Market

14. Sensitivity to rental market Scenario 1 & 2 – Not effected by rental market Scenario 3 – Rent paid is effected.

15. Sensitivity to rental market

16. Conclusions Scenario 1 is almost always preferable – Unless inflation greatly exceeds rental increase Owning a home builds equity Paying rent builds no equity In 30 years the house has value while the apartment is owned by the landlord Inflation does not effect the choice between the 3 scenarios

17. Sources American Home Loans Washington Mutual U.S. Census Bureau U.S. Department of Housing & Urban Development Silicon Valley Business Journal Rentnet.com