A Student’s Dilemma: Rent or Buy Case Solution
There are always expenses and rewards when investing. The case examines a choice that a regular university student will have to make based on quantitative and qualitative considerations. The choice of whether to rent or buy a house to rent out the extra rooms to friends is a difficult one. All option’s advantages and disadvantages must be carefully analyzed. Four options are available to Christine Scott based on buy or rent and inclusive and non-inclusive. Scott and her 4 friends need a house near buy their university to stay next years of university. they want a house with at least 5 rooms and 2 bathrooms in it.
The choice must be based on the NPV of cash flows, and if Scott buys the house and rents it to other 4 roommates what are the benefits of doing that struggle to buy a house, taking responsibility for maintenance, and all in that as well as selling after 3 years. as per our analysis, the buy inclusive option would be the best option for Scott and her friends, because of the large positive NPV to Scott and less rent to her friends as compared to the rent inclusive option(see appendix;1 decision tree). but the selection should be based only on quantitative analysis, she must take into consideration the qualitative factors while selecting an option. the qualitative factors must be the ability of Scott to manage such workload along with studies, and economic conditions after 3-years, etc.
To avoid uncertainty Scott will sign the 3-year contract with her four friends, in return, she will charge less rent as compared to the rent charged by other rent-inclusive options available to them. we assume the monthly rental to charge Scott’s roommates to be $475 (inclusive) because there is a similar unit asking for $510. Scott wants to give her roommates some discount to fill all the rooms and ask them to sign a three-year lease to avoid uncertainties.
The same is the case with the buy non-inclusive option, we assumed $425 monthly rent will be charged to Scott’s roommates, as the similar house that is available on rent such as “rent non-inclusive” asking for $435 monthly rent. we are charging less to avoid uncertainty concerning finding new roommates and convince them with the same term and conditions if old roommates are leaving the house.
In the worst case, we assumed the appreciation in house prices will be 0%, and in the base case, the appreciation will be 5%, to see the impact of house price after 3 years on Scott’s profit. similarly, we assumed the maintenance in the worst case would be $10,000, and in the base case $4000. in the worst case, we assumed the mortgage rate will be 5%, not 3.95%, and in the base case it would be 3%. all these changes have been done to see if worse than our initial assumption happen what will impact profit and if best than our initial assumption will happen what will be the impact on profit as well as choice.
The data for quantitative analysis is given in the case, such as rent of houses available for them, 2% house rate appreciation every year, mortgage rate 3.95%, price of house available for purchasing, opportunity cost 1% per year, utility expenses, Tv/internet bills, insurance, and so on. by using that data and taking some assumption we performed quantitative analysis.
As the result of our quantitative analysis, we came to know that the NPV of both rent options is negative, and the NPV of both buy options is positive, it means that in rent-inclusive, and rent non-inclusive option Scott and her friends have to pay rent so there is not any inflow or profit, but in buy-inclusive, buy non-inclusive option, she case earn a profit on her investment. there is the opportunity cost of 1% per year that she can earn if save that amount of money in the bank.
The net present value (NPV) of the rent-inclusive option is -$18,426.13, and the NPV of rent non-inclusive option is -$16,971.44, however, if Scott and her friend choose to take the house on rent instead of buying a house, the rent non-inclusive option would be better for them. on the other hand, if Scott wants to buy a house and offers to rent that house to her 4 roommates instead of taking a house on rent, the buy-inclusive option will be better because the NPV of the buy-inclusive option is greater than buy non-inclusive option. NPV of buy non-inclusive option is $9714.53, and the NPV of the buy-inclusive option is $14,172.63. Options and associated NPV table below ( see appendix:2)…………..
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