Esme Reynolds is in her late 20s. She is renting an apartment for $1,700 a month. After much thought, she's seriously considering buying a condominium for $335,000. She intends to put 20 percent down and expects that closing costs will amount to another $11,000. A bank has agreed to lend her money at the fixed rate of 5 percent on a 15-year mortgage. Esme would have to pay an annual condominium owner's insurance premium of $680 and property taxes of $3,300 a year (she's now paying renter's insurance of $550 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). Esme's income puts her in the 24 percent tax bracket (she does not itemize her deductions on her tax returns), and she earns an after-tax rate of return on her investments of around 4 percent. Assume that the standard deduction for a single person is $12,950. 1. Given the information provided, use Worksheet 5.2 to evaluate and compare Esme's alternatives of remaining in the apartment or purchasing the condo. (Note: Assume Esme does not have any security deposit.) Round your answers to the nearest cent. Annual ownership cost: Annual rental cost: $ $ 2. Working with a friend who is a realtor, Esme has learned that condos like the one 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? -Select- 3. Describe any other factors that should be considered when making a rent-or-buy decision. Location must be considered. If the purchase unit -Select- near public transportation, there may be additional transportation costs to consider. The length of time she plans to remain in this location and the cost of selling the condo must be considered. If she will stay in the location for -Select- than three years, renting will probably be the better alternative. If she will stay in the location for -Select- than three years, the appreciation will probably cover the cost of selling at a future date. 4. Which alternative would you recommend for Esme in light of your analysis? -Select-
Esme Reynolds is in her late 20s. She is renting an apartment for $1,700 a month. After much thought, she's seriously considering buying a condominium for $335,000. She intends to put 20 percent down and expects that closing costs will amount to another $11,000. A bank has agreed to lend her money at the fixed rate of 5 percent on a 15-year mortgage. Esme would have to pay an annual condominium owner's insurance premium of $680 and property taxes of $3,300 a year (she's now paying renter's insurance of $550 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). Esme's income puts her in the 24 percent tax bracket (she does not itemize her deductions on her tax returns), and she earns an after-tax rate of return on her investments of around 4 percent. Assume that the standard deduction for a single person is $12,950. 1. Given the information provided, use Worksheet 5.2 to evaluate and compare Esme's alternatives of remaining in the apartment or purchasing the condo. (Note: Assume Esme does not have any security deposit.) Round your answers to the nearest cent. Annual ownership cost: Annual rental cost: $ $ 2. Working with a friend who is a realtor, Esme has learned that condos like the one 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? -Select- 3. Describe any other factors that should be considered when making a rent-or-buy decision. Location must be considered. If the purchase unit -Select- near public transportation, there may be additional transportation costs to consider. The length of time she plans to remain in this location and the cost of selling the condo must be considered. If she will stay in the location for -Select- than three years, renting will probably be the better alternative. If she will stay in the location for -Select- than three years, the appreciation will probably cover the cost of selling at a future date. 4. Which alternative would you recommend for Esme in light of your analysis? -Select-
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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