You have done research in the market area and found that (1) properties have historically appreciated at an annual rate of 3 percent per year, and rents on similar properties have also increased at 3 percent annually;
(2) maintenance and insurance are currently $1,500 each per year and they have been increasing at a rate of 3 percent per year;
(3) you are in a 26 percent marginal tax rate and plan to occupy the property as your principal residence for at least four years; and the capital gains exclusion would also apply when you sell the property;
(4) selling costs would be 7 percent in the year of sale;
(5) property taxes have generally been about 2 percent of property value each year.
Based on this information you must decide:
a. In order to decide 10% IRR after taxes on your equity should you buy the property or rent it for a four year period of ownership?
b. What if you expect a period of ownership was to change five years would owning or renting if you wanted to earn a 10% IRR after taxes?