When deciding whether to own or rent a property, the unrecoverable costs of both options must be compared. The assumptions are as follows: for owning a property, the unrecoverable costs include property tax, maintenance costs, and the cost of capital. For renting a property, the only unrecoverable cost is the rent itself. In this scenario, the property tax, maintenance costs, and cost of capital are fixed at a certain percentage.
Example: A property valued at $500,000 is being rented for $15,000 per month. The property tax is 1% of the property value, the maintenance cost is 1% of the property value, and the cost of capital is 3% of the property value. We will determine whether owning or renting the property is the better option.