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Greg Allen, age 25, is considering buying his first house, but is uncertain if it is a better decision than renting an apartment. He could rent a 2,000 square foot, 3 bedroom apartment with a carport for $940 per month. Alternatively he could buy a home closer to his work for $175,000. The home is a 3 bedroom, 2-car garage property with similar square footage to the apartment. By paying $2,000 in closing costs, putting $22,000 down, and taking out a $153,000 mortgage, his payment would be $687 (principal and interest at 4.5% for 30 years) plus $200 per month real estate taxes, $100 per month home insurance, and $25 per month private mortgage insurance. He thinks he would stay in the home for 5 years. He expects his rent to increase and home to appreciate at 2% per year over the 5 years. Investments will return 7% before tax over that period. When he sells the home, he will pay a realtor 6% of the sale price and $2,000 in closing costs. Please prepare an analysis of whether he should rent or buy, considering his cash flow and tax consequences at a federal marginal rate of 25% and a state tax rate of 6% using an Excel spread sheet. Greg itemizes whether he buys the house or not. Assume he buys the home on January 1, 2013. Prepare spreadsheets and a less-than-200-word memo describeing your conclusion whether to buy or rent.

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