Money is saved from owning relative to renting after selling

Assignment Help Financial Management

Reference no: EM131606878

Assume a property can be rented for $12,000 per year ($1,000 per month) or purchased for $150,000 with $30,000 down and financed with a fully amortizing mortgage loan of $120,000 at 7 percent interest for 30 years. Other costs associated with owning include maintenance costs of $500, insurance costs of $500, and property taxes of 2% of the purchase price. Assume the federal income tax rate is 28 percent. Growth rates for expenses (insurance, maintenance, property taxes), rents, and property value are a constant 2 percent per year. After five years, the property will be sold. Selling expenses of 7 percent would have to be paid at that time.

Be sure to show your work in Excel. In other words, do not simply type values into the boxes, but reference prior cells when calculating results

Part 1: Monthly Payment

Fill in the two tables, for property information and loan information, respectively.

Part 2: CPM Loan

Fill in the loan schedules and property data.

Part 3: CAM Loan

Identify how much money is saved from owning relative to renting after selling the house in year 5. If an annual after-tax return of 15% is available on an investment of comparable risk, which is the better option, owning or renting?

Reference no: EM131606878

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