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Human beings must meet three basic needs which are food, clothes and shelter before their life is simplified regardless of their age, sex or geographical location. These basic needs are essential for survival and human beings have devised various ways of acquiring them. Most people have been employed in companies and firms where they earn salaries and wages for services rendered. Others have developed their own businesses and investments where they earn interests in terms of profits. Apart from meeting the above basic needs human beings have always aspired to own property through various means by buying or hiring them. This case study analyzes the suitability of leasing and buying a residential property basing on the desire to earn a positive internal return rate after taxing the capital invested.
According to the research done regarding the market taxes the viable choice that would earn a positive internal rate of return after taxes on my equity would be renting the house rather than buying it. This is due to the fact that renting the property becomes cheaper than buying it. The charges of renting the house are $ 2,000 per month and this means that for one year I will be expected to pay $ 24,000. In addition, this value appreciates at a rate of 3 % per year. This means that by the end of four years I will have paid $ 100,405. The insurance and maintenance costs will be covered by the owner hence I will not incur these expenses. On the other hand buying the house will mean that I acquire a mortgage loan that will finance 80% of the total cost of the house. This means that I will be provided with $ 160,000 at a rate of 6% which is $9,600 in terms of loan interest for a period of thirty years. In addition, despite the fact that the rates of appreciation of rent and property are 3% each means that the house will cost $ 225101.76 after four years; the rate of interest accumulated at the mortgage loan obtained is far much higher than the interest gained from the house. The costs of maintaining and insuring the house are $1500 each and increase at a rate 3% per year meaning that owning the house will make me incur further $ 12,550 for both but hiring it will enable me to save these amounts. The selling cost is currently 7% while property tax is 2% and this means that there will be additional expenses of $ 15,727.12 and $ 4,000 respectively. Therefore, the most appropriate action to take is to rent the property for a four –year period. However, if the expected period of ownership was to change to five years buying the property will be the best option in order to earn a 10% internal rate of return. This is due to the fact that the rent appreciation for the five year period will be $ 103, 417.15 which is more expensive than the cost of buying the house, maintaining, insuring, selling it and the property tax incurred. The level of rates that will make no difference between owning and renting the property for a four- year period would be acquiring 80% mortgage loan at an interest rate of 4% extended over a period of thirty years. The selling costs and property tax should be 8% and1.5 % respectively. The rates of insurance and maintenances should remain at 3 % per year while the property and rent rates change to 3.5 % and 2.5 respectively. These rates will ensure there is a balance in the costs incurred when a person decides to buy or rent the house.
People should consider the offers made on property with regard to hiring or buying them to ensure they have higher internal return rates on their investments. They should not be wooed by attractive terms that may turn expensive in the long run.
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