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Case

Julie’s Rent-or-Buy Decision

Julie Brown is in her late 20s. She is renting an apartment in the fashionable part of town for1,200 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 of550 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

1.Given the information provided, use Worksheet 5.2 to evaluate and compare Julie’s alternatives of remaining in the apartment or purchasing the condo.

2. 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 made in Question 1? Explain.

3. Discuss any other factors that should be considered when making a rent-or-buy decision.

4. Which alternative would you recommend for Julie in light of your analysis?

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