Harvard Case - Should I Rent My Condo? Assessing Risks of a Property Investment
"Should I Rent My Condo? Assessing Risks of a Property Investment" Harvard business case study is written by Craig Furfine. It deals with the challenges in the field of Strategy. The case study is 17 page(s) long and it was first published on : Feb 20, 2020
At Fern Fort University, we recommend that the case protagonist, Sarah, carefully analyze the risks and potential returns of renting out her condo before making a decision. This analysis should include a thorough assessment of the local rental market, potential for future appreciation, and the financial implications of both renting and selling. We advise Sarah to consider the long-term implications of her decision, including potential tax implications, and to seek professional advice from a real estate agent and financial advisor.
2. Background
Sarah, a recent graduate, is faced with the decision of whether to rent out her newly purchased condo or sell it. She has a mortgage payment of $2,000 per month and is currently living with her parents to save money. The condo is located in a desirable area with strong rental demand, but the market is also experiencing some volatility. Sarah is considering the financial implications of both renting and selling, as well as the potential for future appreciation.
3. Analysis of the Case Study
To analyze Sarah's situation, we can utilize a combination of frameworks, including:
SWOT Analysis: This helps us understand Sarah's internal strengths and weaknesses, as well as the external opportunities and threats she faces.
- Strengths: Sarah has a desirable condo in a strong rental market. She is also financially responsible and lives with her parents, allowing her to save money.
- Weaknesses: Sarah lacks experience in property management and may not be comfortable with the potential risks and responsibilities.
- Opportunities: The strong rental demand could lead to a steady income stream. The potential for appreciation could result in a profitable sale in the future.
- Threats: The volatile market could lead to lower rental income or difficulty selling the condo. Property management could be time-consuming and stressful.
Porter's Five Forces: This framework helps us understand the competitive landscape of the rental market.
- Threat of New Entrants: The barrier to entry in the rental market is relatively low, potentially leading to increased competition.
- Bargaining Power of Buyers: Renters have some bargaining power, especially in a volatile market.
- Bargaining Power of Suppliers: Landlords have some bargaining power, particularly in areas with high demand.
- Threat of Substitute Products: Other housing options, such as shared living arrangements or renting a room, could pose a threat.
- Competitive Rivalry: Competition among landlords can be intense, particularly in areas with high demand.
Value Chain Analysis: This helps us understand the different activities involved in renting out the condo and the potential cost and value drivers.
- Inbound Logistics: Managing repairs and maintenance, sourcing cleaning supplies, and handling tenant requests.
- Operations: Marketing the condo, screening tenants, collecting rent, and handling tenant issues.
- Outbound Logistics: Maintaining communication with tenants and ensuring their satisfaction.
- Marketing & Sales: Advertising the condo and attracting potential tenants.
- Service: Providing excellent customer service to tenants and handling any issues promptly.
Financial Analysis: Sarah needs to consider the financial implications of both renting and selling.
- Renting: Potential income, expenses (mortgage, property taxes, insurance, maintenance, etc.), and net profit.
- Selling: Potential sale price, closing costs, and net proceeds.
Risk Analysis: Sarah needs to consider the potential risks associated with renting out her condo.
- Tenant issues: Damage to the property, non-payment of rent, and tenant disputes.
- Market volatility: Decreased rental income or difficulty finding a buyer in the future.
- Property management costs: Unexpected repairs and maintenance expenses.
4. Recommendations
Thorough Market Research: Sarah should conduct thorough research on the local rental market, including average rental rates, vacancy rates, and tenant demographics. This information will help her determine the potential rental income and the feasibility of renting out her condo.
Financial Analysis: Sarah should consult with a financial advisor to analyze the financial implications of both renting and selling. This includes calculating the potential rental income, expenses, and net profit, as well as the potential sale price, closing costs, and net proceeds.
Property Management: Sarah should consider the potential costs and benefits of hiring a professional property manager. While this will add to her expenses, it can also provide valuable expertise and reduce the burden of managing the property herself.
Risk Mitigation: Sarah should consider ways to mitigate the risks associated with renting out her condo. This includes obtaining renter's insurance, screening tenants carefully, and having a clear lease agreement.
Long-Term Considerations: Sarah should consider the long-term implications of her decision, including potential tax implications and the impact on her financial goals.
5. Basis of Recommendations
These recommendations are based on the following considerations:
Core competencies and consistency with mission: Sarah's core competencies lie in her financial responsibility and her ability to save money. Renting out her condo could provide a steady income stream that aligns with her financial goals.
External customers and internal clients: Sarah's external customers would be potential tenants, and her internal client would be herself. By understanding the needs and expectations of both, she can make a more informed decision.
Competitors: Sarah needs to be aware of the competition in the rental market and differentiate her condo to attract tenants. This could involve offering amenities or services that are not readily available in other units.
Attractiveness ' quantitative measures if applicable (e.g., NPV, ROI, break-even, payback): Sarah should calculate the NPV, ROI, break-even point, and payback period for both renting and selling to compare the financial attractiveness of each option.
Assumptions: Sarah should clearly state her assumptions, such as the expected rental income, vacancy rates, and potential appreciation of the condo.
6. Conclusion
The decision of whether to rent or sell her condo is a complex one for Sarah. By conducting thorough research, analyzing the financial implications, and considering the potential risks and benefits, she can make an informed decision that aligns with her financial goals and risk tolerance.
7. Discussion
Other alternatives not selected include:
- Holding the condo: Sarah could choose to hold the condo for a longer period, hoping for appreciation in the future. However, this would require her to continue paying the mortgage and other expenses.
- Selling the condo and renting: Sarah could sell the condo and rent a smaller, more affordable unit. This would free up capital but would also require her to find a suitable rental property.
The risks associated with renting out the condo include:
- Tenant issues: Damage to the property, non-payment of rent, and tenant disputes.
- Market volatility: Decreased rental income or difficulty finding a buyer in the future.
- Property management costs: Unexpected repairs and maintenance expenses.
Key assumptions include:
- Rental income: The expected rental income is based on current market conditions and may fluctuate in the future.
- Vacancy rates: The vacancy rates are based on historical data and may change depending on market conditions.
- Property appreciation: The potential appreciation of the condo is based on market trends and may not materialize.
8. Next Steps
- Conduct market research: Sarah should gather data on rental rates, vacancy rates, and tenant demographics in her area.
- Consult with a financial advisor: Sarah should seek professional advice on the financial implications of renting and selling.
- Develop a budget: Sarah should create a detailed budget for both renting and selling, including all potential expenses.
- Evaluate risk mitigation strategies: Sarah should consider ways to mitigate the risks associated with renting out her condo.
- Make a decision: Based on the research, analysis, and risk assessment, Sarah should make a decision on whether to rent or sell her condo.
By following these steps, Sarah can make a well-informed decision that aligns with her financial goals and risk tolerance.
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Case Description
In early 2018, Diana Mulhall was undertaking a career change that would eliminate the need for frequent business trips to Toronto. As a result, she wondered whether she should sell her condo in the heart of the Canadian city or keep it as a rental property to generate income for herself. The housing market in Toronto was booming, so Mulhall believed that the condo would fetch top dollar as a sale. She also thought it would be easy to attract tenants if she kept it as a rental. She had invested in rental property before but never outside of her hometown of Chicago, so Mulhall needed to identify the key risks associated with being a landlord in Toronto.
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