There are many different scenarios that we have to determine the most productive way of deploying capital, such as: buying versus leasing a car, buying insurance whole life versus term, and of course buying versus renting a home.
You are to create a spreadsheet that tracks the cash flows of a person that had a home buying experience over their lifetime and determine whether they would have been better off buying or leasing their home and investing in some other investment.
The scenario is as follows:
House 1 Buys a house November 1991 for 170,000 Sells the house June 2003 for 650,000 The house was bought with an 80% mortgage with an 8% interest rate and 30 year amortization. Taxes in the first year were 6500 and rose 3% per year. Insurance was 900 for the year and increased 3% per year. Rent would have been 1500 per month.
House 2 Bought in June 2000 for 870,000 Sold November 2015 for 840,000 The house was bought with an 80% mortgage with a 5.25% interest rate and 30 year amortization. Taxes in the first year were 16000 and rose 3% per year. Insurance was 1500 and increase 3% per year. Rent would have been 5200 per month.
Capital. Assume that if you need capital you have it to put in you take it out of real estate then do not calculate returns after the distribution.
The investment can be anything you like, S&P Index, Home Depot Stock, gold, etc (if stock, not more than 25% can be in apple). If you use a specific stock, you must track price, splits and dividends. Take the cash flows from the houses over time and compare that to the cash flows that you would have received had you not bought a house but rented a home and invested instead. You should use various metrics to determine which worked out better. NPV, IRR, Annual Cash on Cash Return and any other metric that you decide is useful. If you have to add cash then add to your alternative investment if cash comes out of the real estate then it comes out for both investments.