Financial Decisions for Real Estate and Auto Companies

Renting Vs. Buying a Condo

A Good Friend is going to live in a building where there are Condo’s available for Sale or for Rent.  Same apartment, floor, building, features & benefits.

Your mutual friend asks your advice.   The background assumptions are listed below.  You can answer this question any way that you feel will be helpful to your friend – either with a specific numerical rationale, or with conceptual responses in case they (or perhaps you) will get lost in the numbers and calculations. Either as an NPV question which minimizes the NPV cost of their “shelter” or as a “future” value question which considers which approach helps them maximize their future wealth.  As you would expect, these two completely different approaches get you to the same decision – or decisions if not a single best answer.

Your friend has good net worth and can buy the Condo for cash if they want, or if not buying the Condo for cash, invest the balance at an assumed rate of return of (measured over the long term) in stocks, bonds, or other investment assets.  As such, they consider their WACC to be. They are confident about their job stability;

The reason for that job stability is that their employer will be having them move to head up another region.  That move will happen in either 2 years or in 5 years, and the odds are 50% that it will be in  years and  in years;

If renting, the monthly cost is – and increases by  each year (they are flat within each 12-month year);

If Buying, the price is but if they buy “all cash” without a mortgage contingency, they can get a quick-close price.   They can’tfinance after the fact… so the only way to mortgage is if they pay the;

With a down payment they qualify for a fixed-rate-year, monthly payment traditional mortgage at This fixed rate is a “no-closing-cost” loan… so no extra fees.  If they rent, the rental payments are also due monthly;

If selling the Condo in 2 years or 5 years because they are moving, they expect the future selling price (before the brokerage and transactions costs) to be (after 2 years) or after five years.  If moving, they will definitively sell the Condo since they do not want to be landlords;

When they sell, 6% is lost to transactions costs (brokerage fee, conveyance tax, and lawyer’s fees);

Investing in Hedge Funds and Alternatives for College Endowments

If buying the Condo, payments are  monthly for taxes and Condo fees (combined).  As you know, tenants don’t pay those fees since their landlord pays them. There is no inflation over the next five years on these costs. The property taxes will notbe tax deductible since they have used up the new tax law’s  limit on SALT (State and Local Taxes) deduction limit on their income taxes.

They would prefer to be known as an “owner” in the building.  The net-present-value (and non-eroding) one-time value of this “psychic income” or “good feeling” is worth to them (in today’s “NPV” dollars) as the current benefit of the own-vs-rent psychic income over their entire time that they will live in the building

College Endowments Opt for An Alternative

 Buffett, Bet with Hedge Funds;

 Private Equity Growing in Size

 Buffett  Annual Letter    

 Harvard Earns 6.5% in the Year Ending 

The Buffett Hedge Fund Article is from last year (involves his 10 year “bet” with some hedge funds), was discussed in class, and has been in the Blackboard Articles Section.  The other three articles are from Newspapers last year (or last week, for the Harvard article).   Assume UPenn is investing their endowment for the long-term and doesn’t have liquidity issues for day-to-day needs.   Everyone in the Board Room turns to you since you Passed. They want to place a large portion of the Endowment into Hedge Funds and investment alternatives that are not designed to track the general stock market.

Please see the graph of stock price performances over the last 5 years, the detailed data sheets (from Yahoo), and the sheet of interest rates from.  The enclosed article from Tesla is a recent article talking about their specific issues, but all companies are having some issues these days.  Please remember that each company does things other than auto’s (Tesla for Solar/Batteries, Honda for motorcycles and other equipment, GM, Ford, and Toyota have large truck divisions, etc.)  Also, all are heavily international these days with only Tesla having the bulk of their revenue in the U.S.

It is Thursday,. The Media and Public Relations directors from Ford, Honda, GM, Toyota, Tesla and other manufactures are in an auto-industry “continuing education” forum learning about how their companies (employers) raise money – sources, types of investors (debt, Equity, Strategic, etc.).  Everyone is complaining and it seems none of the auto companies are happy. Ford laments that they don’t want to raise money by issuing stock since it has fallen almost 38% in the last 5 years and at these prices, the dilution to existing shareholders is very painful.  Honda and Toyota and GM complain that they don’t like to issue stock since the dividend rate they must pay investors is almost as high as what they Bond-holders, and that they get “no respect” for their diversified product and geographical businesses.  Tesla informs the group that they don’t find it that difficult.  They do not need to pay dividends, can issue equity very inexpensively since investors clamor for their stock, and the interest rate on their bonds is an average between the Japanese Companies (low) and the Detroit Companies (GM and Ford) which is a bit higher.  Tesla states that they have the lowest of capital of the five companies mentioned, and as such, that is why they can pursue projects that others would not find profitable (ex: Space Rockets, Solar factories, etc.).  The industry attendees are talking about investment timeframes “generically” – typically a new car design with a tooling cost that will benefit the model run of about years