Question

Based on the following data, would you recommend buying or renting? Rental Costs- Annual costs- Annual rent $7,380, Insurance $145. Security deposit $ 650. - Buying Costs- Annual mortgage payments $9,800 ($9,575 is interest ), Property taxes $ 1,780, Down payment / closing costs $4,500, Growth in equity $225, Insurance / maintenance $1,050, Estimated annual appreciation $ 1,700. Assume an after tax savings interest rate of 6 percent & a tax rate of 28 percent.

Answer 1

Answer:

net annual cost of renting is less than that of purchase

so we can say it is beneficial to rent the property

Explanation:

we know that that Costs Associated with Buying a Property

Annual Mortgage Payment  = $ 9800 ( out of $9575 is interest payment)

Property Taxes = $ 1780

Down Payment  = $ 4500

Insurance / Maintenance = $1050

Total Costs = 17,130

minus here  Tax Savings on Mortgage Interest = $2,681

that is  ( 9575 × 28%)

Tax Savings on Property Taxes = $498.40 i.e (28% of 1780)

Growth in Equity = $225.00

Estimated Annual appreciation= $ 1,700.00

Net Annual cost on purchase= $ 12,025.60

Costs Associated with Renting a Property   Annual Rent = $ 7,380.00

Security Deposit  = $   650.00

Insurance = $   145.00

Total Costs  = $ 8,175.00

Less   Interest receivable on   Down payment amt invested = $ 270.00    

i.e (4500  6% after tax rate)

Net Annual Cost on Renting = $7,905.00

so that here net annual cost of renting is less than that of purchase

so we can say it is beneficial to rent the property