You currently pay $10,000 per year in rent to a landlord for a $100,000 house, w

Question

You currently pay $10,000 per year in rent to a landlord for a $100,000 house, which you are considering purchasing. You can qualify for a loan of $80,000 at 9% if you put $20,000 down on the house. To raise money for the down payment, you would have to liquidate stock earning you a 15% return. We neglect other concerns, like closing costs, capital gains, and tax consequences of owning.

1. Explain the concept of opportunity cost.

2. Explain the fixed cost and the the hidden cost fallacy.

3. Given the described situation, determine whether it is better to rent or own. Show all your calculations and logical arguments.

Explanation / Answer

three things you miss....rate of rise of the housing market and tenure of the loan. and your future investment avenue...

i presume housing market rises as fast as stocks and also that the tunure is 10 years and also that your investment s effectively at 10%.

1. don't

value of rent paid at the end of 10 year is 10000 * [1.1 ^10 -1]/0.1 =159374
value of the house at the end of 10 years is 100000 * 1.15^10 = 404555
value of stocks 20000*1.15^10 =80911

then you are + house - 483018

2. do

EMI for 10 years with 9% would be 12.5% p.a. ie. 10000 p.a. and value will be 159374
value of stocks you sold will be 80911

Then you are + house -240285


this shows buying a house now is 242733 $ beneficaial after 10 yeras [ effectrively, you lose $ 93584 right now by not purchasing]

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