EGR 403 – Project II

Team 12Team 12Lala Garabidian……...(Lala Garabidian……...(OrganizerOrganizer))

Phat Bao………………(Phat Bao………………(OrganizerOrganizer)) Samuel Mangampo……..(Samuel Mangampo……..(TechieTechie))Mark Mckinney……..(Mark Mckinney……..(SummarizerSummarizer))

Buying A House Buying A House vs.vs.

Buying A CondoBuying A Condo

Scenario

Mr. Cal Poly, Pomona alumni graduated in 1999 as an Electrical Engineer who is 32 years old and makes $54K a year. He currently has $27K in his savings account. He is engaged and plans to get married next year and also plans to retire at age 65. He is facing a dilemma of whether to buy a house or a condo—whichever one will be a better investment for him.

Decision-Making Process

CondoHouse

$300,000 $300,000

Down Payment(10%)

Appreciation(8% per annum)

Down Payment(10%)

Association Fees$150/month

Appreciation(6% per annum)

Closing Cost (0.33%)

Closing Cost (0.33%)

Scenario #1Purchasing a HouseDescription

Address: 447 E ADAIR STLong Beach, CA  90805

Price: $300,000 Living space: 1,102 Sq. Ft Estimated payment: $1,579 Per Month Single Family Property Area: Long Beach; North Long Beach County: Los Angeles Single family style

         

More Detailed InformationOn The House 2 car garage Detached garage Concrete block Tile roof Yard(s) on property Lot is 2925 sq. ft. High School District:

LONG BEACH UNIFIED SCHOOL DISTRICT

Formal dining room Living room Approximately 1102 sq. ft Single level Year built: 1977 3 total bedroom(s) 2.00 total bath(s)      

Scenario #2Purchasing a Condo

Description Address: 3721 COUNTRY CLUB DR Unit: 15

Long Beach, CA  90807 Price: $300,000 1,120 Sq. Ft Association fees are $150 mo. Estimated payment: $1,579 Per Month Area: Long Beach; Bixby Knolls County: Los Angeles Condo style Single level

More Detailed InformationOn The Condo Dining area Approximately 1120 sq.

ft. Parking space(s): 2 2.00 total bath(s) Year built: 1974 3 total bedroom(s)

Composition roof In-ground swimming pool Community clubhouse(s) Community sauna/steam

room(s) Patio Master bedroom 2 car garage

AssumptionsHouse Condo

Purchase Price $300,000 $300,000

Down Payment(10%) $30,000 $30,000

Closing Cost(0.33%) $2,137 $1,773

Loan Amount $270,000 $270,000

Monthly Payment

Maintenance 5% of yearly payment 2% of yearly payment

Taxes 1.25% of market price 1.25% of market price

Insurance 0.3% of loan amount 0.3% of loan amount

Association Fee 0 $150/month

Appreciation 8% per annum 6% annually

Cash Flow Diagram

House (in 10 years)

Payment

Property Taxes

Maintenance

Insurance

AA A A A A A A A A

Present Value

FV

$300,000

$647,677

$17,393

Closing Costs

$2,137

$3,750

$810

$870

Cash Flow Diagram

Condo (in 10 years)

Payment

Property Taxes

Maintenance

Insurance

AA A A A A A A A A

Present Value

FV

$300,000

$537,254

$17,393

Closing Costs

$1,773

$3,750

$810

$348

  Rate(%) ROR (house) ROR (condo)

Interest 4 13.16% 6.21%

  5 11.88% 4.70%

  7 9.27% 0.48%

  9 6.67% -3.24%

       

Tax Savings 25 11.59% 4.49%

  28 11.88% 4.70%

  31 12.17% 5.08%

       

Maintenance -1 12.01% 4.84%

  1 11.75% 4.56%

  3 11.48% 4.30%

       

Prop. Taxes 0.25 14.29% 6.70%

  1.25 11.88% 4.70%

  2.25 9.68% 2.08%

Sensitivity Analysis

Sensitivity Analysis continued…

  Rate(%) ROR (house) ROR (condo)

       

Down Payment 10 11.88% 4.70%

  20 10.88% 4.65%

  30 9.15% 5.26%

  6 6.21% 4.70%

  7 9.16% 7.73%

Appreciation 8 11.88% 10.51%

  9 14.42% 13.10%

  10 16.81% 15.54%

       

  10 11.88% 4.70%

Years of keeping the property

20 9.62% 4.98%

  30 8.87% 5.13%

Graph I House

HouseRate vs. ROR (10 yrs.)

02468

10121416

6 7 8

Rate (%)

RO

R (

%)

Payment

Tax Savings

Maintenance

Prop. Taxes

Down Payment

Appreciation

Graph II Condo

CondoRate vs. ROR (10 yrs.)

-4

-2

0

2

4

6

8

10

12

6 7 8

Rate (%)

RO

R (

%)

Interest

Tax Savings

Maintenance

Prop. Taxes

Down Payment

Appreciation

Graph III Appreciation Analysis

AppreciationHouse vs. Condo

0

5

10

15

20

6 7 8 9 10

Appreciation(%)

RO

R (

%)

House

Condo

Graph IVBest Alternative

Comparison of Best Alternatives House vs. Condo (10 yrs.)

0

5

10

15

20

0.25 4 10 10.1 30 31

Rate (%)

RO

R (

%)

House

Condo

Graph VBest Alternative

Time VariationHouse vs. Condo

0

2

4

6

8

10

12

14

10 20 30

Years

RO

R (

%)

House

Condo

Conclusion

Summary Table of the Best Choice Alternatives

House Condo

ROR 16.34% 6.78%

Recommendations

To sell the house after 10 years to gain the most Rate of Return on the asset.

Buy the house, not the condo, because of higher percentage of ROR.

Wait until marriage so that more income can be generated for a better house in a better location.

Rent instead of buying.

Analyze the Rate of Return in 10 years and decide whether to liquidate or not.

Wait until the appreciation goes up then sell it.

Sources Used

Internet

Book: Newnan,D.G, Essentials of Engineering Economic Analysis

Dr.Rosenkrantz