Essay on Buy or Sell

1727 Words7 Pages
There are several factors to consider when deciding whether to rent or buy a home. In our case study, Beth and Jon Linton are considering the critical decision of buying or renting at Stedman Place in Newton, which is a western suburb of Boston, Massachusetts. The timing of this decision is important, as the decision is being made in July of 2006, before the housing market downturn. The case gives insight into the couple’s decision-making process, and the pros and cons of buying versus renting are weighed. There are a few important benefits associated with buying a home that Beth and Jon will want to consider. First, as Beth’s father has mentioned, building equity in a home can be preferable to renting, where there is no chance of…show more content…
Given the warnings of the housing market softening, it would be safe to assume a 4% growth rate. Finally, tax savings are calculated based on deductions from mortgage interest payments and property taxes multiplied by the Lintons’ marginal tax rate of 33%. The recommendation to buy the house instead of renting will not change much assuming the growth rate of their home price differs from 4%. Even though a 5% decline in their home’s value gives an NPV of -$27,294 it is still less than the NPV of renting. Assuming their home’s value stays the same, the decision will still yield a positive NPV which is better than the negative NPV if they decide to rent. As stated earlier, this analysis is dependent on the assumption that the couple will sell the house after 5 years so assuming they sell the house before or after 5 years this recommendation may not hold. FIG 1 By using Future Value method, the total cost of buying house and selling it after 5 years is -$109,300.56, and total cost of renting house after 5 years is -$223,372.94. Based on the cost figures, it seems buying house is a good decision to make instead of renting. The different between the cost of buying and renting a house is $114,072.38. Therefore, the couple will save $114,072.38 if buying the house now and sell it after 5 years. Here are the assumptions in this calculation. * Landlord increases rent by 2.56% every year after year 2006. * The couple keeps
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