![your responses to the questions listed below.
TIME VALUE OF MONEY: THE BUY VERSUS RENT
DECISION
Sean Cleary and Stephen Foerster wrote this case solely to
provide material for class discussion. The authors do not intend
to illustrate either effective or ineffective handling of a
managerial situation. The authors may have disguised certain
names and other identifying information to protect
confidentiality. This publication may not be transmitted,
photocopied, digitized or otherwise reproduced in any form or
by any means without the permission of the copyright holder.
Reproduction of this material is not covered under authorization
by any reproduction rights organization. To order copies or
request permission to reproduce materials, contact Ivey
Publishing, Ivey Business School, Western University, London,
Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e)
[email protected]; www.iveycases.com. Copyright © 2014,
Richard Ivey School of Business Foundation Version: 2015-06-
In May 2013, Rebecca Young completed her MBA and moved to
Toronto for a new job in investment banking. There, she rented
a spacious, two-bedroom condominium for $3,000 per month,
which included parking but not utilities or cable television. In
July 2014, the virtually identical unit next door became
available for sale with an asking price of $620,000, and Young
believed she could purchase it for $600,000. She realized she
was facing the classic buy-versus-rent decision. It was time for
her to apply some of the analytical tools she had acquired in
business school — including “time value of money” concepts —
to her personal life. While Young really liked the condominium
unit she was renting, as well as the condominium building
itself, she felt that it would be inadequate for her long-term
needs, as she planned to move to a house or even to a larger
penthouse condominium within five to 10 years — even sooner](data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///yH5BAEAAAAALAAAAAABAAEAAAIBRAA7)
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- 1. First view this video: https://www.pbs.org/video/columbia-basin-badger-club-charter- schools-hype-or-hope/ Next, respond to the following questions: 1. List 3 contrasting views put forth by Katie and Mathew and then critically analyze them. 2. What sense did you make of the GW highway analogy that Mathew provides? What was he trying to say? 3. Was there a “weak link” in Mathew’s analogy for public schools? 4. What do you make of the element of “choice” that Katie discusses throughout the video. 5. What are some sources of tension particularly as it relates to funding sources and one other aspect (you may choose from equity, access, accessibility, populations served, teacher unions, accountability) that you could parse from this video. 6. Given what you have learned about this contentious issue in education, what role (if at all) might charter schools play in the landscape of a students’ educational experience? In this video analysis, you will be viewing a discussion about the pros and cons of charter schools in WA state. You will be examining the topic of charter schools from multiple perspectives. Be sure to provide reasons and evidence to support your statements. Go deep, consider bringing in materials that you have learned from core courses: (1) Education and Equity in the United States, (2) Theories of Learning, Culture, and Identity, (3) Teaching and Learning in a Multicultural Society, (4) Research and Educational Knowledge and also any relevant real-life experiences when discussing
- 2. your responses to the questions listed below. TIME VALUE OF MONEY: THE BUY VERSUS RENT DECISION Sean Cleary and Stephen Foerster wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) [email protected]; www.iveycases.com. Copyright © 2014, Richard Ivey School of Business Foundation Version: 2015-06- In May 2013, Rebecca Young completed her MBA and moved to Toronto for a new job in investment banking. There, she rented a spacious, two-bedroom condominium for $3,000 per month, which included parking but not utilities or cable television. In July 2014, the virtually identical unit next door became available for sale with an asking price of $620,000, and Young believed she could purchase it for $600,000. She realized she was facing the classic buy-versus-rent decision. It was time for her to apply some of the analytical tools she had acquired in business school — including “time value of money” concepts — to her personal life. While Young really liked the condominium unit she was renting, as well as the condominium building itself, she felt that it would be inadequate for her long-term needs, as she planned to move to a house or even to a larger penthouse condominium within five to 10 years — even sooner
- 3. if her job continued to work out well. Friends and family had given Young a variety of mixed opinions concerning the buy- versus-rent debate, ranging from “you’re throwing your money away on rent” to “it’s better to keep things as cheap and flexible as possible until you are ready to settle in for good.” She realized that both sides presented good arguments, but she wanted to analyze the buy-versus-rent decision from a quantitative point of view in order to provide some context for the qualitative considerations that would ultimately be a major part of her decision. FINANCIAL DETAILS If Young purchased the new condominium, she would pay monthly condo fees of $1,055 per month, plus property taxes of $300 per month on the unit. Unlike when renting, she would also be responsible for repairs and general maintenance, which she estimated would average $600 per year. If she decided to purchase the new unit, Young intended to provide a cash down payment of 20 per cent of the purchase price. There was also a local deed-transfer tax of approximately 1.5 per cent of the purchase price, and a provincial deed-transfer tax of 1.5 per cent, both due on the purchase date. (For Page 2 simplicity, Young planned to initially ignore any other tax considerations throughout her analysis.) Other closing fees were estimated to be around $2,000. In order to finance the remaining 80 per cent of the purchase price, Young contacted several lenders and found that she would be able to obtain a mortgage at a 4 per cent “quoted” annual rate1 that would be locked in for a 10-year term and that she would amortize the mortgage over 25 years, with monthly payments. The money that Young was planning to use for her down payment and closing costs was presently invested and was earning the same effective monthly
- 4. rate of return as she would be paying on her mortgage. Young assumed that if she were to sell the condominium — say, in the next two to 10 years — she would pay 5 per cent of the selling price to realtor fees plus $2,000 in other closing fees. SCENARIO ANALYSIS In order to complete a financial analysis of the buy-versus-rent decision, Young realized that her first task would be to determine the required monthly mortgage payments. Next, she wanted to determine the opportunity cost (on a monthly basis) of using the lump-sum required funds for the condominium purchase rather than leaving those funds invested and earning the effective monthly rate, assumed to be equivalent to the mortgage rate. She would then be able to determine additional monthly payments required to buy the condominium compared to renting, including the opportunity cost. Young wanted to consider what might happen if she chose to sell the condominium at a future date. She was confident that any re-sell would not happen for at least two years, but it could certainly happen in five or 10 years’ time. She needed to model the amount of the outstanding principal at various points in the future — two, five or 10 years from now. She then wanted to determine the net future gain or loss after two, five and 10 years under the following scenarios, which she had determined were possible after some due diligence regarding future real-estate prices in the Toronto condo market: (a) The condo price remains unchanged; (b) The condo price drops 10 per cent over the next two years, then increases back to its purchase price by the end of five years, then increases by a total of 10 per cent from the original purchase price by the end of 10 years; (c) The condo price increases annually by the annual rate of inflation of 2 per cent per year over the next 10 years; and (d) The condo price increases annually by an annual rate of 5 per cent per year over the next 10 years. FINAL CONSIDERATIONS Young realized she had a tough decision ahead of her, but she was well trained to make these
- 5. types of decisions. She also recognized that her decision would not be based on quantitative factors alone; it would need to be based on any qualitative considerations as well. She knew she needed to act soon because condominiums were selling fairly quickly, and she would need to arrange financing and contact a lawyer to assist in any paperwork if she decided to buy. Sheet1BuyingRentingInvestingMortgageMonthly Rent$ 3,000Current Amount$ 140,000Purchase Price$ 600,000Monthly Interest Samantha Pilleri: Same rate as mortgage0.33%Down Payment (20%)$ 120,000Deed-Transfer Tax (3%) Samantha Pilleri: Includes 1.5% each for local and provincial - due on purchase date$ 18,000FV Year 2$ 72,000FV Year 2$151,640Closing Fees$ 2,000FV Year 5$ 180,000FV Year 5$170,940Purchase Price including Closing Fees and Deed- Transfer Tax$ 620,000FV Year 10$ 360,000FV Year 10$208,717Annual Interest Samantha Pilleri: Locked in for 10 year term Samantha Pilleri: Same rate as mortgage4%Monthly Interest0.33%Amount Of Loan480,000Year 2 (Investing- Renting)$79,640# Periods (25 yrs) Samantha Pilleri: 25 year amortized mortgage w/ monthly pmts300Year 5 (Investing-Renting)($9,060)Selling Realtor Fee5%Year 10 (Investing-Renting)($151,283)Selling Closing Costs2,000Monthly Expenses$ 600,0003.333%Condo Fees$ 1,055$ 20,000Taxes$ 300Repairs$ 50Mortage Payment$ 2,534Total$ 3,939Year 2 Periods24Year 5 Periods60Year 10 Periods120Scenario (a): Condo Price Remains UnchangedBuy
- 6. OptionYear 2Year 5Year 10Condo Value$ 600,000$ 600,000$ 600,000Remaining Loan Balance$ 456,713$ 418,102$ 342,525Equity$ 143,287$ 181,898$ 257,475Realtor Fee (5%)$ 30,000$ 30,000$ 30,000Closing Costs$ 2,000$ 2,000$ 2,000Investment Gain$ 111,287$ 149,898$ 225,475Monthly Payments$ 94,527$ 236,317$ 472,634Investment Gain$ 16,760$ (86,419)$ (247,159)Renting Impact$ 79,640($9,060)($151,283)Scenario (b): Condo Price Drops 10% in Year 2, Returns to Purchase Price in Year 5, Increases 10% in Year 10Buy OptionYear 2Year 5Year 10Condo Value$ 540,000$ 600,000$ 660,000Remaining Loan Balance$ 456,713$ 418,102$ 342,525Equity$ 83,287$ 181,898$ 317,475Realtor Fee (5%)$ 27,000$ 30,000$ 33,000Closing Costs$ 2,000$ 2,000$ 2,000Investment Gain$ 54,287$ 149,898$ 282,475Monthly Payments$ 94,527$ 236,317$ 472,634Investment Gain$ (40,240)$ (86,419)$ (190,159)Renting Impact$ 79,640($9,060)($151,283)Scenario (c): Condo Price Increases Annually by 2% Year Over YearBuy OptionYear 2Year 5Year 10Condo Value$ 624,240$ 662,448$ 731,397Remaining Loan Balance$ 456,713$ 418,102$ 342,525Equity$ 167,527$ 244,346$ 388,872Realtor Fee (5%)$ 31,212$ 33,122$ 36,570Closing Costs$ 2,000$ 2,000$ 2,000Investment Gain$ 134,315$ 209,224$ 350,302Monthly Payments$ 94,527$ 236,317$ 472,634Investment Gain$ 39,788$ (27,093)$ (122,332)Renting Impact$ 79,640($9,060)($151,283)Scenario (d): Condo Price Increases Annually by 5% Year Over YearBuy OptionYear 2Year 5Year 10Condo Value$ 661,500$ 765,769$ 977,337Remaining Loan Balance$ 456,713$ 418,102$ 342,525Equity$ 204,787$ 347,667$ 634,812Realtor Fee (5%)$ 33,075$ 38,288$ 48,867Closing Costs$ 2,000$ 2,000$ 2,000Investment Gain$ 169,712$ 307,378$ 583,945Monthly Payments$ 94,527$ 236,317$ 472,634Investment Gain$ 75,185$ 71,061$ 111,311Renting Impact$ 79,640($9,060)($151,283)
- 7. Monthly Mortgage PaymentsAmount Of Loan480,000Annual Interest4.000%Monthly Interest0.333%# Periods300Payment$2,533.62Annual Payment$30,403.40Lifetime Payments$760,085.05.ScheduledBeginningInterestPrincipalEndi ng PercentYearMonthPaymentBalancePaidPaidBalancePaidPaid PrincipalTotal Mortgage Payments1$2,533.62480,000.001,600.00$933.62479,066.380.19 %0.19%$ 2,533.622$2,533.62479,066.381,596.89$936.73478,129.650.20 %0.39%$ 5,067.233$2,533.62478,129.651,593.77$939.85477,189.800.20 %0.59%$ 7,600.854$2,533.62477,189.801,590.63$942.98476,246.820.20 %0.78%$ 10,134.475$2,533.62476,246.821,587.49$946.13475,300.690.20 %0.98%$ 12,668.086$2,533.62475,300.691,584.34$949.28474,351.410.20 %1.18%$ 15,201.707$2,533.62474,351.411,581.17$952.45473,398.960.20 %1.38%$ 17,735.328$2,533.62473,398.961,578.00$955.62472,443.340.20 %1.57%$ 20,268.939$2,533.62472,443.341,574.81$958.81471,484.540.20 %1.77%$ 22,802.5510$2,533.62471,484.541,571.62$962.00470,522.540.2 0%1.97%$ 25,336.1711$2,533.62470,522.541,568.41$965.21469,557.330.2 0%2.18%$ 27,869.79112$2,533.62469,557.331,565.19$968.43468,588.900. 20%2.38%$ 30,403.4013$2,533.62468,588.901,561.96$971.65467,617.250.2 0%2.58%$ 32,937.0214$2,533.62467,617.251,558.72$974.89466,642.360.2 0%2.78%$ 35,470.6415$2,533.62466,642.361,555.47$978.14465,664.210.2
- 23. 0%92.29%$ 722,080.80286$2,533.6237,009.67123.37$2,410.2534,599.410.5 0%92.79%$ 724,614.41287$2,533.6234,599.41115.33$2,418.2932,181.130.5 0%93.30%$ 727,148.0324288$2,533.6232,181.13107.27$2,426.3529,754.78 0.51%93.80%$ 729,681.65289$2,533.6229,754.7899.18$2,434.4327,320.350.51 %94.31%$ 732,215.26290$2,533.6227,320.3591.07$2,442.5524,877.800.51 %94.82%$ 734,748.88291$2,533.6224,877.8082.93$2,450.6922,427.110.51 %95.33%$ 737,282.50292$2,533.6222,427.1174.76$2,458.8619,968.250.51 %95.84%$ 739,816.12293$2,533.6219,968.2566.56$2,467.0617,501.190.51 %96.35%$ 742,349.73294$2,533.6217,501.1958.34$2,475.2815,025.910.52 %96.87%$ 744,883.35295$2,533.6215,025.9150.09$2,483.5312,542.380.52 %97.39%$ 747,416.97296$2,533.6212,542.3841.81$2,491.8110,050.570.52 %97.91%$ 749,950.58297$2,533.6210,050.5733.50$2,500.117,550.460.52 %98.43%$ 752,484.20298$2,533.627,550.4625.17$2,508.455,042.010.52% 98.95%$ 755,017.82299$2,533.625,042.0116.81$2,516.812,525.200.52% 99.47%$ 757,551.4325300$2,533.622,525.208.42$2,525.200.000.53%100 .00%$ 760,085.05 Sheet1Cost to BuyCost to RentInvestment OpportunityReturn from SalePurchase Price$600,000.00Monthly Rent$3,000.00Rent/Buy Difference$14,868.002 Years- $88,726.00One Time FeesReturn at 2 years$30,330.725
- 24. Years$6,501.00Down Payment (20%)$120,000.00Return at 3 years$46,411.9510 Years$138,363.00Deed Transfer Tax (3%)$18,000.00Return at 4 years$63,136.43Purchase Closing Fee$2,000.00Return at 5 years$80,529.88Selling Closing Fee$2,000.00Return at 6 years$98,619.08Realtor Fees at 2 Years$27,000.00Return at 7 years$117,431.84Realtor Fees at 5 Years$30,000.00Return at 8 years$136,997.12Realtor Fees at 10 Years$33,000.00Return at 9 years$157,345.00Return at 10 years$178,506.80Monthly FeesMontly Mortgage Payment$2,534.00Condo Fees per Month$1,055.00Rent at 1 Year$36,000.00Maintenance per Month$50.00Rent at 2 Years$72,000.00Property Tax per Month$600.00Rent at 5 Years$180,000.00Monthly Fees per Year$50,868.00Rent at 10 Years$360,000.00One Time Fees at 2 years$169,000.00Mortgage BalanceOne Time Fees at 5 years$172,000.002 Years$459,726.00One Time Fees at 10 years$175,000.005 Years$421,499.0010 Years$346,637.00 Critique your peers’ posts in relation to your own recommendation considering the assumptions your peers have made. Support your critique with sound reasoning and evidence. Clarence B This was a great exercise. At first, I felt a little overwhelmed, but by the end I was looking at the numbers with a different mindset. I think the rent vs. buy decision is one that we have all had at one point in time or another. It isn't always this perfect example of buying/renting the exact same property. In looking at the data, it is my conclusion that Rebecca should absolutely rent. This comes from that fact that she knows she will not stay in the property for longer than 10 years. There is often a profit to be made from purchasing a property for 10 years and reselling it, but the difference in monthly cost between renting and buying makes the length for profitability much longer. One of the items that help me make my decision, is the fact that
- 25. Rebecca looks to try to get the biggest ROI she can get, so I assume she would invest the difference between the cost to buy and the cost to rent. If Rebecca invested the difference, and the money got a modest 4% return, she would get a bigger ROI from investing the money saved at 10 years, than selling at 10 years. There might be some room if she were to purchase a less expensive property, but the difference in fees between renting and buying makes this too much to overcome. Cleary, S., & Foerster, S. (2014). Time Value of Money; The Buy Versus Rent Decision. Ivey Publishing. Samantha P There were numerous data points that had to be considered when determining the best decision on whether to rent or buy in four different scenarios. First, I calculated what the financial impact of renting would be utilizing the data that was given in the case study. Based solely on these numbers it looks like renting for any amount of time over five years would not be the best option. However, after considering the different scenarios, I found that this in fact was not the case. I then went on to determine what the financial impact of the four different scenarios would be. I did this by first calculating what the return on equity was by deducting the remaining loan balance from the value of the condo. I then factored in the cost to sell the condo, as well as the monthly costs that were incurred. After determining these values, I was able to compare the metrics of buying the condo and renting. When considering the first and second scenarios, renting would be the better financial option since Young is able to better invest her money. When analyzing scenario three, Young would be better off renting if she plans to sell the condo in either year two or year five; however, if she plans to hold onto the condo until year ten then buying would be the better option. In the last scenario, it would be wiser for Young to continue to rent if she was planning to sell the condo in year two; however, it would be
- 26. better for her to buy if she plans to sell in either five or ten. References Cleary, S., & Foerster, S. (2014). Time value of money: The buy versus rent decision. Retrieved from https://mbsdirect.vitalsource.com/#/books/9781307045062/cfi/2 35!/4/[email protected]:0.00 Rent or buy. (2020). Retrieved from https://www.realtor.com/mortgage/tools/rent-or-buy-calculator/