PROJECT: BUY VS. RENT ANALYSIS.
The purpose of this project is to answer the question of whether you should buy or rent a home in a particular metropolitan area. You will be working on this assignment in a group of three to five students. The assignment is due on or before february 5th at 11:55 p.m. Est. By that time you should submit an electronic copy (via email to: of your assignment. If you turn your assignment late, 10% will be deducted from your grade for every calendar-day delay.
Before you begin working on this project, one representative from each group must email me with the names of the group members and i will assign you a city for your analysis.
Your complete assignment should read and look like a professional report and include the following sections:
1. Short introduction: get the reader engaged in the report and tell the reader what he/she is about to read.
2. Description of the subject properties: you will identify three properties on zillow in your assigned city, for which both price "zestimate" and rent "zestimate" are available. All three properties must be located in the same city or metropolitan area. You should briefly describe the properties and include basic relevant information about the properties as well as a picture or two of each of the three properties.
3. Purchase and rent prices assumptions: for analysis purposes you should assume that you can buy a home in your assigned city for the average "zestimate" price of three properties you selected. Similarly, you should assume that you can rent a home in that city for the average rent "zestimate" price of the three properties you selected.
Please note: while we know that the "zestimates" provided by zillow are not always accurate, it is above the scope of this project to challenge their "zestimates". Therefore, in this project you should accept the "zestimates" as given.
4. Setting and assumptions: create an excel spreadsheet that compares buying a property in the city of your choice to renting a similar property. Your excel spreadsheet should include the following assumptions:
- Inflation expectation: a fair estimation (must be justified in the text).
- Purchase price: your average purchase price from part 3.
- Initial rent: your average rent price from part 3.
- Rental growth rate: a reasonable estimation for the area (must be justified in the text).
- Property appreciation: first estimate what is a reasonable rate of appreciation for your area over the long run and then arrive with reasonable assumption for a reasonable rate of appreciation over the medium term (6 years) (must be justified in the text).
- Insurance: a reasonable assumption for the area (must be justified in the text).
- Maintenance: a reasonable assumption (must be justified in the text). Here you should also consider dues charged, if any, by the building or neighborhood association.
- Expense growth: equals to your property appreciation rate.
- Marginal tax rate: 25%
- Property tax: a reasonable assumption for the area (must be justified in the text).
- Down payment: 20%
- Loan amount: 80%
- Interest rate: current market rate for individuals with high credit score.
- Mortgage initiation fee: a reasonable assumption (must be justified in the text).
- Loan type: fixed rate 30-year (cpm)
- Payment: calculated accordingly
- Holding period: 6 years
- Selling expenses: 6.50%
- Investment opportunity: a reasonable assumption (must be justified in the text).
5. Analysis: based on your excel spreadsheet, answer the following questions. Each answer should be accompanied with a snapshot from the appropriate modified excel spreadsheet.
A. Should you (or a person with similar expectation to yours) buy or rent a property in the area you explored?
B. If you were to buy the average property you considered, what would be your imputed rent? In other words, how much would it cost you per month to live in your own home?
C. At what price you would need to purchase the average property in order to be indifferent between buying and renting?
D. What is the minimum annual rate of property appreciation on the average property in order to be better off buying than renting? Do you think that this rate of appreciation is reasonable?
E. What annual rate of property appreciation should you expect on the average property in order for the imputed rent to be zero? Do you think that this expectation is reasonable?
6. Discussion and summary: this section will include a brief discussion of your buy vs. Rent analysis and a conclusion that summarizes your findings.
Attachment:- Buy-vs-rent-excel-work-in-progress.xls