A house in a college town recently sold for $250k. The market interest rate is 5% per year.
a) According to the arbitrage condition, what is the annual rental rate if the buyer of the house chooses to rent to students?
b) Suppose the buyer has a marginal tax rate of 25%. He borrowed the entirety of the sum needed to buy the house. If he chooses to live in the house, he would be eligible for the MITD. Given the arbitrage condition, what is the implicit rental rate for our buyer if he lives in the home?
c) Suppose the buyer made a down payment of $50k on the house (20%), and borrowed the remaining $200k. What is the implicit rental rate for the buyer if he chooses to live in the home?
d) We've got three different rental rates in parts a-c. Why? Explain what's going on in a clearly written paragraph using economic terminology.