A couple plans to purchase a home for $340,000. Property taxes are expected to be $1,200 per year while insurance premiums are estimated to be $1400 per year. Annual repair and maintenance are estimated at $1,950. An alternative is to rent a house of about the same size for $2,150 per month [approximate using $25,800 per year]. If an 8.0% return before-taxes is the couple's minimum rate of return, what must the resale value be 10 years from today for the cost of ownership to equal the cost of renting?
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To find the minimum resale value needed, we need to calculate the future value of the costs of owning the home and compare it to the future value of renting.
Cost of owning per year: Property taxes + insurance premiums + repair and maintenance
= $1,200 + $1,400 + $1,950
= $4,550
Future value of owning after 10 years: Cost of owning per year * number of years
= $4,550 * 10
= $45,500
Future value of renting after 10 years: Cost of renting per year * number of years
= $25,800 * 10
= $258,000
The minimum resale value needed is the difference between these two amounts:
Resale value = Future value of renting - Future value of owning
= $258,000 - $45,500
= $212,500
Therefore, the resale value for the cost of ownership to equal the cost of renting after 10 years must be at least $212,500.
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