2023 Corporate Finance – Rent Vs Buy Case SUBMISSION BY GROUP 3: 36BM05 ADARSH 36BM30 K.ABHINAV 36BM27 KHUSHBU 36BM22 HARSH 36BM52 SUDHANSHU 36BM49 SHASHWAT 1.0 PROBLEM STATEMENT Rebecca Young dislocated to Toronto for a new job in an investment bank after completing her MBA. She's in a dilemma of choosing whether to purchase a condominium or continue to reside in her rented condominium. objects The purpose is to estimate the present situation and provided scenarios that may probably arise in the future and help Rebecca decide. Decision is supposed to be grounded not only on quantitative factors but also on qualitative considerations. CASE SOLUTION • Assumption Some hypotheticals need to be considered to assess the case. The rent growth rate (rental price inflation) wasn't counted, and we assumed that all the affiliated charges similar as condo fee, repair costs and levies would remain the same, and we avoided the general inflation rate. The total original investment is considered $ 140,000(see Exhibit A1). We assumed that she had withdrawn the yearly interest from the investment account, and we didn't recoup the yearly interest. Rental price inflation, property appreciation, and the general inflation rate were not included in our assessment. Furthermore, we assumed that the bank does not charge any repayment penalty when closing the loan. Monthly Mortgage Grounded on 4% annual rate and semi-annual compounding, the effective annual rate was calculated to be 4.04, and consequently, the effective monthly rate is 0.337%. Thus, predicated on the 80% value of the property, she should pay $ 2,544.23 as a monthly mortgage payment (see Exhibit A2). Opportunity Cost The return- on- investment rate is considered the same as the effective yearly rate of 0.337%. thus, the one- month opportunity cost will be $471.33 (see Exhibit A3). Additional Monthly Payment However, the difference in monthly payment is minus her rental fee if Rebecca decides to purchase the property instead of renting. Her payment in case of purchase is $4,420.56, where her rent is $3,000. So, if she purchases the property, she must pay $1,420.56 extra per month (see Exhibit A4). • Mortgage Loan Principal Outstanding (See Exhibit B1) Exhibit B1 Mortgage Loan Principal Outstanding Interest/Mo nth At start 0.337% Loan Amount Initial 480000.00 Principal Paid 0 Principal Outstanding After 2 years After 5 Years After 10 Years 0.337% 0.337% 0.337% 480000.00 480000.00 480000.00 23161.71 61603.11 136970.38 456838.29 418396.89 343029.62 • Net Future Gain or Loss To determine the net gain/ loss, we calculated the forecasted selling price and from it deducted all original payments and charges made by Rebecca previously, such as monthly additional payments, selling expenses, and the principal outstanding. (see Exhibit B2- B5). Scenario(a) As shown in Exhibit B2, when the price remains unchanged, she'd lose in 2, 5and 10 years, $62931.73, $75630.49 and$85496.82 respectively. Scenario(b) For the 2nd case where condo price fluctuates; she'd still lose $119931.73, $75630.49, and $28496.82 respectively. (See Exhibit B3) Scenario(c) In case of a 2% increase annually, Rebecca would still lose $39903.73 in 2 years and $16304.43 in 5 Years. However, she'd gain $39330.00 in 10 years (see Exhibit B4). Scenario(d) Eventually, as per Exhibit B5, if the annual increase rate is 5% per annum, she'd still lose $4506.73 in 2 years. However, she'd gain $81850.00 in 5 years and $272973.12 in 10 Years. It's apparent that scenario(d), is the most optimistic market forecast, and hence it will be salutary in 5- and 10- Year Projections. • Conclusion Rebecca should consider the mortgage payment as a remuneration or a recoverable entity over the long term, whereas a rental payment is not a recoverable expenditure. The unrecoverable costs when purchasing is property tax, maintenance fee, general maintenance, mortgage interest, and the cost of capital among other things. In addition, the net future gain/ loss indicated in exhibition B2- B5 depicts that given her forecasts for scenarios (c) and (d), where she's awaiting a gradational increase in property value, she must estimate and revisit values constantly and revisit her computations as well. Rebecca should also consider the general inflation rate for charges like condo fees, Property Tax, and General conservation charges, as these charges will probably increase dependent on the inflation rate. Likewise, to have a better comparison between rent and buy, she should read the rent growth rate (rental price inflation) grounded on actual data. Also, the property's future value is significantly influenced by the original economy. As a result, a recession increases the liability of losing her job and being unfit to pay her mortgage and reducing her chances of employment in other regions as she may not be suitable to go to relocate. Renting provides lesser freedom and inflexibility than owning since a tenant may move much further freely, and she could increase her investment monthly. The disadvantage of renting a property is that the landlord may decide to sell it and may have to ask her to dispose of the property. Also, while a 10- year fixed mortgage is the riskiest option for carrying her against interest rate fluctuations, 10- year term fixed rates are frequently higher than shorter periods (like 2 or 5 years).