Financial Decision Making: Buy vs. Rent a Property, Study Guides, Projects, Research of Law

Download Financial Decision Making: Buy vs. Rent a Property and more Study Guides, Projects, Research Law in PDF only on Docsity!

FNCE 623 Financial Management

Table of Contents

• 1. Introduction:............................................................................................................................................
• 2.1. Description:...........................................................................................................................................
  • 2.1.1. Findings and Assumption:..............................................................................................................
  • 2.2.2. Analysis:.........................................................................................................................................
• 3. Recommendation and Conclusion:..........................................................................................................
• References:..................................................................................................................................................

2.1. Description: From the facts of the case, she requires to decide on the mortgage payment, future real estate prices, cost of borrowing, opportunity costs, costs of buying and selling, and the economy also. 2.1.1. Findings and Assumption:  Rebecca must calculate the month-to-month economic cost of how to use the installments cash for the rental property purchase but instead of investing them and earning the very same impactful monthly payment as the financing such as loans and mortgages.  Furthermore, especially compared to leasing, the opportunity cost of the extra mortgage repayments demanded to own the rental property is lower.  Young thought that if Rebecca sold the property in the following three to ten years, Rebecca would make a profit. Rebecca will pay 5 percent of the mortgage amount in brokerage fees, as well as dollar 2,000 in plenty of other down-payment (Petters, & Dong, (2016), p6 (1)).  In this case, they measure and evaluate the two opportunities i.e.

• Start paying dollar 3000 in rent and bills and buy shares of the leftover funds at around the same effective monthly fee which is presumed to be identical towards the loan amount.
• They bought a new property with both a 20 percent with the dollar of 600,000 security installment i.e. 600000*20 %= $120,000. The financial details are given in this case that there is a main debt for 80% of the appraised value dollar 480,000. A 1.5 percent local deed transfer of property duty on the purchase date i.e. $9,000, a 1.5 percent regional property tax on the purchase date i.e. dollar 9,000, and so many other transaction expenses of dollar 2,000.  Thus, Rebecca can stay in her property and expect to be paid a dollar 3,000 monthly to stay there. Rebecca would indeed be prepared to sustain investing her account, which currently yields around dollar 475 each month compared if Rebecca made such a selection. As a result, the

recurring payment installments needed to purchase with the rent should be put into alternative and comparable investments with a better cost of capital (Siemiatycki, & Farooqi, (2012), p (1)). 2.2.2. Analysis:  Monthly Mortgage Payment, Outstanding Mortgage Balance :

• After finding, they analyzed the monthly mortgage payment, outstanding Mortgage Balance by Rebecca purchasing the residential property apartment, the annual working capital. The minimum payment method of the loan is determined from the chart using Annuity calculations. Thus, it is estimated that the monthly amount of financial institutions such as loans and mortgage is about dollar 2533.62. From the given case, the mortgage involves the taxes, property taxes, as well as property construction and replacement which is about the monthly payments of dollar 3,938.62.
• After finding, the opportunity cost also shows the future value after the two to ten years. Based on monthly, instead of investing similar money and generating relatively similar practical monthly premium also as the current interest rate which is all about the dollar 414.21, it is stated at cost for settlement (personal loan + any loan fees) are used (Kurzban, & Myers, (2013),p36(3)).
• After finding, the outstanding Mortgage Balance, the above illustrates that after each month, the earliest stages fundamental annual interest on the capital less the minimum payment equals the ending primary i.e. the remaining unpaid on the mortgage. It involves the total principle at the final result of 24 months for two years is dollar 456,712.90, the total principal at 60 months for five years is $ 418,102.16, the total investment after 120 months for ten years is dollar 342,525.10.  Buy decision vs. Rent Decision :

Thus, if Rebecca wishes to move into an apartment or maybe even a greater another house residential property within the next 5 - 10 years, they can keep her down- payment by renting the rental properties to that of another occupant. With, as a result of economies of scale, the landlord's monthly rent might have risen to at least cover the difference of both the current mortgage and the monthly cost of the rental house (Mayer & Gupta, (2014), p5 (1)).

3. Recommendation and Conclusion: This is to be concluded, by emulating the two opportunities shown above, the best opportunity is to purchase the apartment by taking the loan because this opportunity provides the ownership for the long term. Such opportunities are very expensive than leasing, although rentals have no restriction it does not provide ownership, although if she remains in a rented property for several years. The suggestion would like to give to Rebecca is that renting is also a good opportunity because if Rebecca wants to purchase between the 5 to 10 years home and perhaps a larger apartment in the future years.

References: Petters, A. O., & Dong, X. (2016). The Time Value of Money. In An Introduction to Mathematical Finance with Applications (pp. 13-82). Springer, New York, NY. Available at, https://link.springer.com/chapter/10.1007/978-1-4939-3783-7_ Siemiatycki, M., & Farooqi, N. (2012). Value for money and risk in public–private partnerships: Evaluating the evidence. Journal of the American Planning Association , 78 (3), 286-299. Available at, https://www.tandfonline.com/doi/abs/10.1080/01944363.2012. Kurzban, R., Duckworth, A., Kable, J. W., & Myers, J. (2013). An opportunity cost model of subjective effort and task performance. Behavioral and brain sciences , 36 (6), 661-679. Available at, https://www.cambridge.org/core/journals/behavioral-and-brain-sciences/article/abs/an- opportunity-cost-model-of-subjective-effort-and-task-performance/ 8EB5B3A090D390C92891C703EC420A Di Maggio, M., Kermani, A., Keys, B. J., Piskorski, T., Ramcharan, R., Seru, A., & Yao, V. (2017). Interest rate pass-through: Mortgage rates, household consumption, and voluntary deleveraging. American Economic Review , 107 (11), 3550-88. Available at, https://www.aeaweb.org/articles?id=10.1257%2Faer.20141313&within%5Btitle %5D=on&within%5Babstract%5D=on&within%5Bauthor%5D=on&journal=1&from=j Di Maggio, M., Kermani, A., & Palmer, C. J. (2020). How quantitative easing works: Evidence on the refinancing channel. The Review of Economic Studies , 87 (3), 1498-1528. Available at, https://academic.oup.com/restud/article-abstract/87/3/1498/ Mayer, C., Morrison, E., Piskorski, T., & Gupta, A. (2014). Mortgage modification and strategic behavior: Evidence from a legal settlement with countrywide. American Economic Review , 104 (9), 2830-57. Available at, https://www.aeaweb.org/articles?id=10.1257/aer.104.9.