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assumed that she had withdrawn the yearly interest from the investment account, and we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).