Macarena Yanez

A Student’s dilemma: Rent or Buy?

1. Create a decision tree outlining Scott’s Options.
2. What are the costs/income associated with Scotts decision each year over three years?
a. Rent inclusively, she pays only the tv/internet
If Scott rents an all-inclusive property, her yearly expenses will include her rent payments and TV/internet
payments:

Yearly Expense s = $ 510 rent

x 12 months +

rent
[ ][ ]
month month

Yearly Expense s =$ 6,120+$ 560=$ 6,680 per year

rent

Scott’s Bank Account beginning balance is $25,000. Each year, $6,680 will be subtracted from this balance and
1% interest will be earned on the remaining balance. For example:
Final Balance Year One =($ 25,000−$ 6,680) (1.001)=$ 18,338 Final Balance Year Two=($ 18,338−$ 6,680 )
(1.001)=$ 11,670 Final Balance Year Three =($ 11,670−$ 6,680 )(1.001)=$ 4,995
After renting for three years and assuming no yearly income as a full-time student,
Scott will have $4,995 left in her bank account. See the chart on the following page for more detail.
b. Buy and charge rent inclusively (assume there are no additional closing costs)
If Scott chooses to buy a home and charge inclusive rent, her expenses and income will greatly differ than if
she had rented. The following charts show her yearly expenses, her profit over 3 years, and then her profit
after selling her house.
If Scott buys a house and rents it to friends for $550 per month per bedroom, she will have $59,971.51 after 3
years as shown below. When she then sells the house, and pays off her loan, her final profit will be $38,355.57
(see chart and calculations on the next page).
 Down Payment −$ 47,800
House Payment −$ 12,047.44 per year Property Tax =1.4427 % x House Value ¿ Previous Year
Property Tax Year One=0.0014427 x $ 239,000=$ 344.81
Property Tax Year Two=0.0014427 x ( $ 239,000 x 1.002)=$ 345.49 Property Tax Year Three=0.0014427 x
( $ 239,000 x 1.002 x 1.002)=$ 346.19 Insurance−$ 1,200 per year
Maintenance− $ 6,000 =$ 2,000 per year
3 years
[ ]
Hydro𝖠Gas= ( $ 130 x 4 mo.)+( $ 130 x 1.5 x 4 mo .)+ ($ 130 x 0.5 x 4 mo.) =$ 1,560 yr

Water Heater=$ 120 x 3=$ 360 per year

Hydro
/ Heater 20 % adjustment=($ 1,560+ $ 360) x 0.20=$ 384 per year Gas
Internet 𝖠TV =$ 70 x 8 mo .=$ 560

3. What happens if the housing market is stagnate at the end of three years??
a. Depreciates
If the market is stagnate, Scott’s house value will be stagnate. If the house value is the same in three years as
when she bought it, the house value will technically have depreciated because a dollar is worth less three
years from now. The present value of the house would be less than the value it was purchased at. Additionally,
the stagnate market could force Scott to sell at a reduced price to attract a buyer. There is always risk in
investment, and a stagnate market possibility is the risk Scott will accept when she purchases a home.

b. Appreciated
If the market is stagnate, Scott’s home will not appreciate in value. What causes appreciation? Most homes
appreciate slowly over time, but key factors like location (being in a town that is rapidly growing) or
investment in renovations/updates/remodels could result in appreciation of home value.
4. Based on a three-year time horizon, should Scott buy or rent? Why
Using only financial information, I would recommend Scott buy a house for the three-year time period. The
house is projected to increase in value by 2% each year, with a final value of $240,436.87 after the 3-year
period. If Scott charges
$550 per month to each of her friends for three years and then sells, she will end up with a positive cash flow
of $38,355.57 into her bank account. Her $25,000 investment will earn her a $38,355.57 return.
If Scott rents, she will slowly use her $25,000 in the bank to pay for her rent expenses and the remaining bank
balance will earn 1% interest each year. At the end of 3 years, Scott would have $4,995 remaining in her
account.
From a financial analysis standpoint, Scott should choose to invest in a new property rather than spend money
on rent that will earn her no returns.

5. If you were in Scott’s position what would you do? And Why?
If I were in Scott’s position and I were the age that I am today, I would purchase the home. I recognize the
profit that could be made from the investment and would be happy to know that my living expenses over the
3-year period were leading me to a positive cash flow outcome (rather than gone for good to rent).
If I were to rewind a few years and were a young college student, I am not sure that I would make the “buy”
decision. As a sophomore student, I don’t know that my young self would be ready for the property
management and stress involved with owning a home and renting it to friends. The numbers look great, but
the reality would be difficult. My studies and grades could be negatively affected, and my friendships could be
strained – conducting business with friends or relatives is different than conducting business with strangers. At
times it can be difficult and can lead to arguments that would otherwise not have existed. At age 19/20, I
think I would have decided to rent so as to ensure my focus was on school and not property management.
 Macarena Yanez
ent’s dilemma: Rent or Buy?
ns.
cotts decision each year over three years?
t
arly expenses will include her rent payments and TV/internet

$ 70 tv
x 8 months

][ ]
month

r year
5,000. Each year, $6,680 will be subtracted from this balance and
alance. For example:
(1.001)=$ 18,338 Final Balance Year Two=($ 18,338−$ 6,680 )
$ 11,670−$ 6,680 )(1.001)=$ 4,995
yearly income as a full-time student,
nt. See the chart on the following page for more detail.
e are no additional closing costs)
clusive rent, her expenses and income will greatly differ than if
r yearly expenses, her profit over 3 years, and then her profit

or $550 per month per bedroom, she will have $59,971.51 after 3
e house, and pays off her loan, her final profit will be $38,355.57
.
 Property Tax =1.4427 % x House Value ¿ Previous Year
,000=$ 344.81
9,000 x 1.002)=$ 345.49 Property Tax Year Three=0.0014427 x
rance−$ 1,200 per year

]
.) =$ 1,560 yr

360) x 0.20=$ 384 per year Gas

ate at the end of three years??

will be stagnate. If the house value is the same in three years as

nically have depreciated because a dollar is worth less three
se would be less than the value it was purchased at. Additionally,
at a reduced price to attract a buyer. There is always risk in
is the risk Scott will accept when she purchases a home.

ot appreciate in value. What causes appreciation? Most homes

ike location (being in a town that is rapidly growing) or
could result in appreciation of home value.
cott buy or rent? Why
mmend Scott buy a house for the three-year time period. The
each year, with a final value of $240,436.87 after the 3-year

ee years and then sells, she will end up with a positive cash flow
,000 investment will earn her a $38,355.57 return.
in the bank to pay for her rent expenses and the remaining bank
e end of 3 years, Scott would have $4,995 remaining in her

ould choose to invest in a new property rather than spend money

u do? And Why?

e that I am today, I would purchase the home. I recognize the
nt and would be happy to know that my living expenses over the
ash flow outcome (rather than gone for good to rent).
ung college student, I am not sure that I would make the “buy”
ow that my young self would be ready for the property
a home and renting it to friends. The numbers look great, but
grades could be negatively affected, and my friendships could be
relatives is different than conducting business with strangers. At
ments that would otherwise not have existed. At age 19/20, I
sure my focus was on school and not property management.