Project #2Project #2

Buying a HouseBuying a House Urban - Old Urban - Old

vs.vs. Suburban - Brand NewSuburban - Brand New

Team MembersTeam Members::Scott TatmanScott Tatman

Bo XuBo XuDavid SacilottoDavid Sacilotto

Carmen IvanescuCarmen IvanescuVeronica HollidayVeronica Holliday

IntroductionIntroduction

Family of 4 – Parents and 2 high school kidsFamily of 4 – Parents and 2 high school kids

Annual household income of $100,000Annual household income of $100,000

Purchase either an older house in the city of Los Angeles Purchase either an older house in the city of Los Angeles

or brand new house in suburban area.or brand new house in suburban area.

Planning to resale the house after 10 years.Planning to resale the house after 10 years.

Which option will yield greater rate return?Which option will yield greater rate return?

Scenario - 1Scenario - 1

Older home located in Los Angeles area.Older home located in Los Angeles area. Built in 1927Built in 1927 4 bedroom, 2 bathroom, garage, 1,970 sq ft4 bedroom, 2 bathroom, garage, 1,970 sq ft Home loan information:Home loan information:

- $329,995.00 home cost.- $329,995.00 home cost.- $65,999.00 down payment (20%).- $65,999.00 down payment (20%).- $263,996.00 loan.- $263,996.00 loan.- $30 years loan at 6% mortgage rate.- $30 years loan at 6% mortgage rate.- $1,598.25 monthly payment.- $1,598.25 monthly payment.

Scenario 1 ContinueScenario 1 Continue

Total first year improvements expenses: $12,456Total first year improvements expenses: $12,456

- - $1,500.00 for painting$1,500.00 for painting

- $2,000.00 for new fence- $2,000.00 for new fence

- $2,343.00 for new front door- $2,343.00 for new front door

- $3,019.00 for kitchen cabinets- $3,019.00 for kitchen cabinets

- $3594.00 for new appliances- $3594.00 for new appliances

Maintenance costs are higher in the first 5 years Maintenance costs are higher in the first 5 years and decrease afterwardsand decrease afterwards

Scenario - 2Scenario - 2

New Home Located in Ontario.New Home Located in Ontario. Build in 2004Build in 2004 4 bedroom, 2 bathroom, 2 car garage, 1,750 sq ft4 bedroom, 2 bathroom, 2 car garage, 1,750 sq ft Home loan information:Home loan information:

- $373,990.00 home cost.- $373,990.00 home cost.

- $74,798.00 down payment (20%).- $74,798.00 down payment (20%).

- $299,192.00 loan.- $299,192.00 loan.

- $30 years loan at 6% mortgage rate.- $30 years loan at 6% mortgage rate.

- $1,811.33 monthly payment.- $1,811.33 monthly payment.

Scenario 2 ContinueScenario 2 Continue

House is fully equippedHouse is fully equipped Total first year expenses:Total first year expenses:

- Landscaping: 5000 square footLandscaping: 5000 square foot- $2,000.00 for grass- $2,000.00 for grass- $3,000.00 for trees- $3,000.00 for trees- $5,000.00 for irrigation- $5,000.00 for irrigation- $1,000.00 for sculpture- $1,000.00 for sculpture

No maintenance costs the first 5 yearsNo maintenance costs the first 5 years $1,000 yearly maintenance after 5 years$1,000 yearly maintenance after 5 years

ResultsResults

Other Assumptions:Other Assumptions:

- Property Tax Rate: 1.25% - city, - Property Tax Rate: 1.25% - city,

1.75% - suburban1.75% - suburban

- Home insurance 1% of value of house- Home insurance 1% of value of house

- MARR 5%- MARR 5% Using the Rate of Return Analysis, a brand Using the Rate of Return Analysis, a brand

new suburban home is the better choice.new suburban home is the better choice.

Sensitivity Analysis 1Sensitivity Analysis 1

Sensitivity Analysis on Appreciation Rate

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

8.00% 9.00% 10.00% 11.00%

Appreciation Rate

Inc

rem

en

tal R

OR

Rate Suburban

Rate Urban

MARR

Sensitivity Analysis 2Sensitivity Analysis 2

Sensitivity Analysis on Mortgage Rate

0.00%

2.00%4.00%

6.00%8.00%

10.00%

12.00%14.00%

16.00%

4.50% 6.50% 8.50% 10.50%

Mortgage Rate

Inc

rem

en

tal

RO

R

IncrementalRORMARR

Sensitivity Analysis 3Sensitivity Analysis 3

Sensitivity Analysis on Upgrade and Repair Costs Spread

0.00%

5.00%

10.00%

15.00%

20.00%

0 2 4 6 8 10 12

Years cost is spread over

Incr

emen

tal

RO

R

City

Suburban

MARR

Sensitivity Analysis 4Sensitivity Analysis 4

Sensitivity Analysis on Analysis Length Variation

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

0 5 10 15

Length of Analysis in Years

Incr

emen

tal

RO

R

Incremental ROR

MARR

ConclusionConclusion

The sensitivity analysis showed that, with The sensitivity analysis showed that, with realistic variations of the above assumptions, realistic variations of the above assumptions, the brand new home in the suburban area is the brand new home in the suburban area is preferable to the older home in the city.preferable to the older home in the city.

ResourcesResources

http://realestate.yahoo.comhttp://realestate.yahoo.com http://assesormap.co.la.ushttp://assesormap.co.la.us MLS listing on msn.comMLS listing on msn.com Essentials of Engineering Economic Analysis, Essentials of Engineering Economic Analysis,

22ndnd Ed., Newnan, Lavelle, and Eschenbach Ed., Newnan, Lavelle, and Eschenbach