1) You are thinking about the option to buy or rent the single residential property. You can rent it for $2000 per month and owner would be accountable for maintenance, property insurance, and property taxes. On the other hand, you can buy this property for $200,000 and finance it with the 80% mortgage loan at 6% interest which will completely amortize over 30-year period. Loan can be prepaid at any time without punishment.
You have done research in market area and found that properties have historically appreciated at annual rate of 3% per year, and rents on related properties have also improved at 3% annually; maintenance and insurance are presently $1,500.00 each per year and they have been rising at a rate of 3% per year; you are in 26% marginal tax rate and plan to dwell in the property as your principal residence for at least 4 years; capital gains exclusion would apply when you sell property; selling costs would be 7% in year of sale; and property taxes have usually been about 2% of property value each year.
Based on the information given you should decide:
a) In order to earn 10% IRR after taxes on equity, must you buy property or rent it for a 4-year period of ownership?
b) What if your expected period of ownership was to alter to 5 years. Would owning or renting be better if you wanted to earn a 10% IRR after taxes?
c) Approximately what level of rents would make you uninterested between owning and renting for a 4-year period? Suppose a 4.5% after-tax IRR would be minimum you would need to earn capital invested in the home.
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