Julie’s Rent-or-Buy Decision
Julie Brown is in her late 20s. She is renting an apartment in the fashionable part of town for $1,200 a month. After much thought, she’s seriously considering buying a condominium for $175,000. She intends to put 20 percent down and expects that closing costs will amount to another $5,000; a commercial bank has agreed to lend her money at the fixed rate of 6 percent on a 15-year mortgage. Julie would have to pay an annual condominium owner’s insurance premium of $600 and property taxes of $1,200 a year (she’s now paying renter’s insurance of $550 per year). In addition, she estimates that annual maintenance expenses will be about 0.5 percent of the price of the condo (which includes a $30 monthly fee to the property owners’ association). Julie’s income puts her in the 25 percent tax bracket (she itemizes her deductions on her tax returns), and she earns an after-tax rate of return on her investments of around 4 percent.
Critical Thinking Questions
Given the information provided, use Worksheet 5.2 to evaluate and compare Julie’s alternatives of remaining in the apartment or purchasing the condo. I have included a completed spreadsheet below. But review my entries and reconcile the numbers to the above facts presented. Be sure you can see where the numbers come from. Your task is to use this information and answer the following questions.
Working with a friend who is a realtor, Julie has learned that condos like the one that she’s thinking of buying are appreciating in value at the rate of 3.5 percent a year and are expected to continue doing so. Would such information affect the rent-or-buy decision. Explain. I have included the expected appreciation in the spreadsheet . What does this mean to Julie as she makes her decision? What does this mean in terms of building her net worth?
Discuss any other factors that should be considered when making a rent-or-buy decision.
Which alternative would you recommend for Julie in light of your analysis?
Your submission should answer each question with a substantive paragraph of 4 – 5 sentences in length. Please type the question as well as your answer