Buy or Rent ?
8. Suppose you currently rent an apartment and have an option to buy it for $200,000. Property taxes are $2,000 per year and are deductible for income tax purposes. Annual maintenance costs on the property are $1,500 per year and are not tax deductible. You expect property taxes and maintenance costs to increase at the rate of inflation. Your income tax rate is 40%, you can earn an after-tax real interest rate of 2% per year, and you plan to keep the apartment forever. What is the “break-even” annual rent such that you would buy it if the rent exceeds this amount?