Buy vs. Lease a HomeIntroductionScenario 1- BuyScenario 2- BuyScenario 3 - LeaseScenario 1 ResultsScenario 2 ResultsScenario 3 ResultsScenario ComparisonSensitivity to inflationSlide 11Sensitivity to Housing MarketSlide 13Sensitivity to rental marketSlide 15ConclusionsSourcesBuy vs. Lease a HomeBuy vs. Lease a HomeJeffrey Scheinost – OrganizerStephen Casey – “Techie”Omabamid Odubela – SummarizerMohammad Fazil – “Techie”EGR 403, Summer 2004, Team 10IntroductionIntroductionBuying vs. Leasing a home–Analysis ConsiderationsBuyer/Leaser- combined household income $90,000Invests 10% annuallyAssume taxes are constant 25%Can have money for down paymentScenario 1- BuyScenario 1- BuyCondominium in GlendalePriced at $370,0001245 s.f., 3 bedroom, 2.5 bathPuts 20% downFixed Mortgage –6.5% A.P.R. Lender: American Home Loans–30 Year LoanMaintenance costs increased with inflationPresent Worth AnalysisScenario 2- BuyScenario 2- BuyCondominium in GlendalePriced at $370,0001245 s.f., 3 bedroom, 2.5 bath95% Financed w/ Private Mortgage Insurance–$196/month until 20% of the original value of the house is paidFixed Mortgage –6.5% A.P.R. Lender: American Home Loans–30 Year Loan30 year loanMaintenance costs increased with inflationPresent Worth AnalysisScenario 3 - LeaseScenario 3 - LeaseApartment located in Glendale CA 1250 s.f. 3 bedroom, 2 bathRental price of $1,700 per month ($500 Security Deposit)Annual rent increase of 3.5%No Maintenance costs involvedPresent Worth AnalysisScenario 1 ResultsScenario 1 ResultsBenefits: Income tax savings–Deduct interest from Adjusted Gross IncomeCosts–Property Taxes ~2% the value of the home–Homeowners insurance ~ 1% the value of the home–House payment–MaintenanceSalvage value after 30 years: $1,200,057.08–Average increase of 4% over 30 yearsNet Present Worth: ($392,883.05)Scenario 2 ResultsScenario 2 ResultsBenefits: Income tax savings–Deduct interest from Adjusted Gross IncomeCosts–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)Scenario 3 ResultsScenario 3 ResultsBenefit: $2,500 per year standard income tax deductionCosts:–Rent–Renter’s Insurance (Minimal, not included)Intangible Benefit:–No Maintenance–Easy to move–Lower Annual CostNet Present Value: ($779,841.95)Scenario ComparisonScenario ComparisonScenario Net Present WorthBuying a home 20% down-$392,883.05Buying a home 5% down -$405,321.28Leasing -$779,841.95Sensitivity to inflationSensitivity to inflationScenario 1 & 2–Increased maintenance cost–PMI and house payment remain constant–Property tax remains constant assuming inflation does not effect the housing marketScenario 3–Rent would remain constant assuming inflation does not effect the rental marketSensitivity to inflationSensitivity to inflation($900,000.00)($800,000.00)($700,000.00)($600,000.00)($500,000.00)($400,000.00)($300,000.00)($200,000.00)($100,000.00)$0.001 2 3 4 5 6 7 8 9Scen. 1Scen.2Scen 3.Sensitivity to Housing MarketSensitivity to Housing MarketScenario 1 & 2–Effects property tax and homeowners insurance–Effects salvage value of the houseScenario 3–This scenario is not effected assuming the rental market is not effected by the housing market.Sensitivity to Housing MarketSensitivity to Housing Market($900,000.00)($800,000.00)($700,000.00)($600,000.00)($500,000.00)($400,000.00)($300,000.00)($200,000.00)($100,000.00)$0.000% 2% 4% 6% 8%Scen. 1Scen.2Scen 3.Sensitivity to rental marketSensitivity to rental marketScenario 1 & 2 –Not effected by rental marketScenario 3–Rent paid is effected.Sensitivity to rental marketSensitivity to rental market($1,800,000.00)($1,600,000.00)($1,400,000.00)($1,200,000.00)($1,000,000.00)($800,000.00)($600,000.00)($400,000.00)($200,000.00)$0.000.00% 2.00% 4.00% 6.00% 8.00% 10.00%12.00%Scen. 1Scen.2Scen 3.ConclusionsConclusionsScenario 1 is almost always preferable–Unless inflation greatly exceeds rental increaseOwning a home builds equity Paying rent builds no equity In 30 years the house has value while the apartment is owned by the landlordInflation does not effect the choice between the 3 scenariosSourcesSourcesAmerican Home LoansWashington MutualU.S. Census BureauU.S. Department of Housing & Urban DevelopmentSilicon Valley Business
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