Question

11. Jill buys a house for $800k, lives there for exactly 10 years and sells it. Suppose Jill's annual cost of ownership is exactly equal to the annual rent she would have paid to live in the same house. Suppose the price of Jill's house grows 3.4% annually. Buying expenses are 5% of purchase price and selling expenses are 8% of sale price. Compute Jill's annual IRR from owning net of renting. (hint: look at the buy vs rent slides, assume no mortgage.)

Answer 1

Answer:

Requirement is to compute annual IRR from owning net of renting.

As annual cost of ownership is exactly equal to the annual rent both are not considered in our incremental analysis of Cash flow from ownership over renting.

Year 0 cash outflow Initial investment = Purchase cost + Buying expenses = 800000 + 800000 * 5% = $840,000

Sale value at the end year 10 = 800000 * (1 + 3.4%) ¹⁰ = $1117623.11

Year 10 Cash inflow =Sale value - Selling expenses

= $1117623.11 - $1117623.11 * 8%

=$1028213.26

To calculate IRR we can use excel function RATE:

Annual IRR = RATE (nper, pmt, pv, fv, type) = (10, 0, -840000, 1028213.26, 0) = 2.04%

Annual IRR from owning net of renting = 2.04%