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A Student’s Dilemma: Rent or Buy Case Solution & Answer

A Student’s Dilemma: Rent or Buy Case Solution

Executive Summary

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, is a difficult one. All option’s advantages and disadvantages must be carefully analyzed. There are four options available to Christine Scott, based on buying or renting and inclusive and non-inclusive. Scott and her 4 friends need a house near by their university to stay in till their next academic 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 will the benefits of doing that struggle to buy a house and taking the responsibility of maintenance, and then selling the house after 3 years. As per our analysis, buy inclusive option would be the best option for Scott and his friends, because of the large positive NPV to Scott and less rent to her friends as compared to the rent inclusive option.

Assumptions

To avoid uncertainty;  Scott will sign a 3-years contract with her four friends, but in return, she will charge less rent as compared to other rent-inclusive options available to them. We assume the monthly rental for Scott to charge her roommates to be $475 (inclusive) because there is a similar unit asking for $510. It seems a reasonable option to give your roommates some discount to fill all the rooms and to ask them to sign a three-year lease to avoid the uncertainties.

The same is the case with the buy non-inclusive option.We assumed the rent which Scott will charge her friends to be $425 monthly, as the similar house that is available for rent is non-inclusive, and is asking for $435 as monthly rent. We are charging less to avoid uncertainty concerning finding new roommates and convincing them with the same term and conditions if old roommates leave the house.

In the worst case, we assumed the appreciation in house prices to be zero, and in the base case; the appreciation will be 5%, to see the impact of house’s price on Scott’s profit after 3 years. Similarly, we assumed that in the worst case; the maintenance would be $10,000, and in the base case it would be $4000. In the worst case; we assumed the mortgage rate to be 5% rather than 3.95%, and in the base case; it would be 3%. All these changes are done to see if the scenario will be much worse than our initial assumption; then what will be its impact on profit and vice versa………………………….

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