TIME VALUE OF MONEY: THE BUY VERSUS RENT DECISION
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In May 2013, Rebecca Young completed her MBA and moved to Toronto for a new job in investment
banking. There, she rented a spacious, two-bedroom condominium for $3,000 per month, which included
parking but not utilities or cable television. In July 2014, the virtually identical unit next door became
available for sale with an asking price of $620,000, and Young believed she could purchase it for
$600,000. She realized she was facing the classic buy-versus-rent decision. It was time for her to apply
some of the analytical tools she had acquired in business school â€” including â€œtime value of moneyâ€
concepts â€” to her personal life.
While Young really liked the condominium unit she was renting, as well as the condominium building
itself, she felt that it would be inadequate for her long-term needs, as she planned to move to a house or
even to a larger penthouse condominium within five to 10 years â€” even sooner if her job continued to
work out well.
Friends and family had given Young a variety of mixed opinions concerning the buy-versus-rent debate,
ranging from â€œyouâ€™re throwing your money away on rentâ€ to â€œitâ€™s better to keep things as cheap and
flexible as possible until you are ready to settle in for good.â€ She realized that both sides presented good
arguments, but she wanted to analyze the buy-versus-rent decision from a quantitative point of view in
order to provide some context for the qualitative considerations that would ultimately be a major part of
If Young purchased the new condominium, she would pay monthly condo fees of $1,055 per month, plus
property taxes of $300 per month on the unit. Unlike when renting, she would also be responsible for
repairs and general maintenance, which she estimated would average $600 per year.
If she decided to purchase the new