Harvard Case - The Cartwrights' Next Home: To Rent or To Buy?
"The Cartwrights' Next Home: To Rent or To Buy?" Harvard business case study is written by Emily R. McComb, Sara L. Fleiss. It deals with the challenges in the field of Finance. The case study is 4 page(s) long and it was first published on : Nov 22, 2022
At Fern Fort University, we recommend that the Cartwrights purchase a home in their current neighborhood. This decision is based on a comprehensive analysis of their financial situation, housing market trends, and personal preferences.
2. Background
The Cartwrights, a young couple with a growing family, are facing a crucial decision: whether to rent or buy their next home. They currently reside in a comfortable rental property but are considering purchasing a larger home to accommodate their expanding family.
The case study presents the Cartwrights' financial situation, including their income, expenses, and existing debt. It also highlights their desire for a larger home with a yard for their children, as well as their concerns about the potential risks and costs associated with homeownership.
3. Analysis of the Case Study
To analyze the Cartwrights' situation, we employed a framework combining financial analysis and personal finance considerations.
Financial Analysis:
- Capital Budgeting: We conducted a thorough financial analysis to compare the costs and benefits of renting versus buying. This included calculating the present value of future rent payments versus the present value of mortgage payments, considering factors like interest rates, property appreciation, and potential maintenance costs.
- Cash Flow Management: We analyzed the Cartwrights' cash flow to determine their ability to afford a mortgage payment, considering their current income, expenses, and debt obligations. We also factored in potential future expenses such as property taxes, insurance, and maintenance.
- Risk Assessment: We assessed the potential risks associated with homeownership, including market fluctuations, interest rate changes, and unexpected maintenance costs. We also considered the risk of potential job loss or income instability.
Personal Finance:
- Financial Strategy: We evaluated the Cartwrights' long-term financial strategy and their goals for wealth accumulation. Homeownership can be a significant investment and contribute to building equity over time.
- Decision Making: We considered the Cartwrights' personal preferences and priorities, including their desire for a larger home with a yard and their desire for stability and a sense of belonging in their current neighborhood.
4. Recommendations
Based on our analysis, we recommend the following:
- Purchase a home in their current neighborhood. This decision aligns with their desire for a larger home with a yard and their preference for staying in their current community.
- Secure a mortgage with a fixed interest rate. This will protect them from potential interest rate fluctuations and provide predictable monthly payments.
- Maintain a healthy debt-to-income ratio. This will ensure they can comfortably afford their mortgage payments and avoid financial strain.
- Establish an emergency fund. This will provide a financial cushion in case of unexpected expenses or job loss.
- Prioritize saving for future home improvements and maintenance. This will help them manage potential costs associated with homeownership.
5. Basis of Recommendations
Our recommendations are based on the following factors:
- Core competencies and consistency with mission: The Cartwrights' desire for a larger home with a yard aligns with their long-term goals for family growth and stability.
- External customers and internal clients: The recommendation considers the Cartwrights' personal preferences and priorities, ensuring a solution that meets their needs and aspirations.
- Competitors: While renting offers flexibility, the potential for rent increases and lack of equity building make homeownership a more attractive long-term investment.
- Attractiveness - quantitative measures: Our financial analysis indicates that purchasing a home in their current neighborhood offers a better return on investment compared to renting in the long run.
- Assumptions: Our recommendations are based on the assumption that the Cartwrights' income and employment stability will remain consistent. We also assume that the housing market in their current neighborhood will continue to appreciate over time.
6. Conclusion
Based on a comprehensive analysis of their financial situation, housing market trends, and personal preferences, we recommend that the Cartwrights purchase a home in their current neighborhood. This decision offers a strong return on investment, provides stability for their growing family, and aligns with their desire for a larger home with a yard.
7. Discussion
Other Alternatives:
- Renting for a longer period: This option provides flexibility and avoids the upfront costs of homeownership. However, it also means missing out on potential equity growth and the benefits of owning a home.
- Relocating to a more affordable neighborhood: This could reduce the cost of homeownership but might require sacrificing their desired lifestyle and community.
Risks and Key Assumptions:
- Market fluctuations: The housing market can be volatile, and property values may decline. This could impact the Cartwrights' investment and potentially lead to a loss.
- Interest rate changes: Interest rates can fluctuate, impacting the cost of their mortgage payments.
- Unexpected expenses: Homeownership comes with unexpected expenses such as repairs and maintenance. The Cartwrights need to be prepared for these costs.
8. Next Steps
- Secure pre-approval for a mortgage. This will give them a clear understanding of their borrowing power and help them find a home within their budget.
- Work with a real estate agent to find a suitable property. An experienced agent can guide them through the home-buying process and help them find a home that meets their needs and budget.
- Negotiate a fair purchase price. This is a crucial step in ensuring they get a good deal on their investment.
- Complete the closing process. This involves signing legal documents and transferring ownership of the property.
By following these steps, the Cartwrights can navigate the home-buying process with confidence and secure a valuable investment for their family's future.
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