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The House on Ramsay Street
This case considers a simple buy-versus-rent decision in the context of an individual family home. In mid-2022, the rise in real estate prices in the Washington, DC, metro area has resulted in a dramatic increase in the rental rates for a young working couple. They must compare paying the higher rent with an opportunity to buy their friends' house on Ramsay Street. This decision elicits a discounted-cash-flow analysis that serves as an introduction to valuation based on equity residual cash flow. The mortgage financing required with the house purchase invites a discussion of leverage and its effect on the risk of their equity stake as well as the appropriate risk premium to be used in the discount rate. At the Darden School of Business, this case is used in the elective courses "Managerial Finance" and "Valuation in Financial Markets," as an introduction to equity-residual-cash-flow valuation and financial risk.