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  1. business
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  3. you are considering an option to purchase or rent

You are considering an option to purchase or rent a single residential property. You can...

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Accounting

You are considering an option to purchase or rent a single residential property. You can rent it for $2,000 per month and the owner would be responsible for maintenance, property insurance, and property taxes.

Alternatively, you can purchase this property for $200,000 and finance it with an 80% mortgage at 6% interest, 30 year fixed. The loan can be prepaid at any time with no penalty.

You have done research in the market and found that properties have historically appreciated at an annual rate of 3% per year. Rents on similar properties have also increased at the same rate. Maintenance and insurance are currently $1,500 each per year and they have been increasing at a rate of 3% per year. Property taxes have generally been about 2% of the property value each year.

If you purchase, the plan is to occupy the property for at least four years. Selling costs would be 7% in the year of sale.

Based on this information you must decide:

In order to earn a 10% internal rate of return, should you buy the property or rent it for a four-year period of ownership?

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