Time Value of Money: Buy Verus Rent

Time Value of Money: The Buy Versus Rent Decision

Rebecca Young completed her MBA and moved to Toronto in May 2013, for a new job in investment banking. She rented a spacious two bedroom condominium for $3,000 per month. In July 2014 the identical unit next door became available for sale and Young believed she could purchase it for $600,000. However, she felt that the condominium would be inadequate for her long-term needs and plans to sell in-between two and ten years. Analyzing Young’s buy versus rent decision from a quantitative point of view will ultimately reveal the best financial decision.

If young pursues the new condominium she plans on providing a cash down payment of 20 percent of the purchase price or $120,000. In order to finance the remaining 80 percent she would be able to obtain a mortgage at a 4 percent quoted annual rate locked in for a 10-year term and amortized the mortgage over 25 years with monthly payments. With approval of this loan Young’s monthly mortgage payments would be $2,536.62. Versus her current monthly rent payment of $3,000.

Although the monthly mortgage payments are more affordable than Young’s monthly rent payments, this comparison does not reflect the true opportunity cost between renting and buying. If Young purchases the new condominium, she would pay monthly condominium fees of $1,055 per month plus property taxes of $300 per month on the unit. She would also be responsible for repairs and general maintenance, which she estimates would average $50 per month. There is also a local deed-transfer tax of approximately 1.5 percent of the purchase price, and a provincial deed-transfer tax of another 1.5 percent, both due on the purchase date. All other closing fees are assumed to cost around $2,000. Combining both deed-transfer taxes and other closing fees Young stands to pay $20,000 on the purchase date alone. With condominium fees, property taxes and general maintenance tallied onto her monthly mortgage payment...