Do you really ever make real $$$ on your own home?

[1 FMF]

here's an example:
place purchased at 140, lived in it 3 years, sold at 210, so 210...

- 140 (original purchase price)
- 10.5 (5% RE commission)
- 22 (approx interest on 7% mortgage of 100k for three years)
- 5 (new carpet)
- 2 (all maintenance/upgrades done myself)
- 3.6 (1200 x 3 for property tax)
= 26k ahead

further subtract the principle payments of the mortgage, about 3.3, plus the extra 1 it cost for a refinance, still end up > 20k ahead.

Like willy said, buy low sell high, but sell quick before mortgage interest and property tax eat the profits. The real argument is what you want to consider cost of living vs cost of ownership and how you figure the profit.

 

[JHZR2]

quote:

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Originally posted by michaelc80:
Why not buy a starter home (200K ain't a starter home) and build some sweat equity in it?

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Depends where you live. In many areas of the east coast, $200k wont buy you a starter home.

The homes Im looking at for $200k are indeed starter homes. 2bedroom units mainly.

I will not live more than 30 miles from work, it is what it is... Call it dumb, but Ive been doing 35 mile commutes so far with traffic, and it stinks bigtime.

JMH

 

[Al]

quote:

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Originally posted by JHZR2:
Yeah sure, I could build equity, but currently I pay $800/mo for 2br, 2ba apartment with ~1200 sq ft.

In NJ, anywhere with any sort of reasonable commute (driving expenses are going to cut into profits, etc), with a reasonable school district and good town, 2br 2ba will easily be 180-200k, for a fixer upper. Tough to realize any profit vs my current rental rates, I think... H

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Its hard for anyhone to get ahead in the People's Republic of N.J. You'll have to leave there when you retire. I have a couple of friends there that are close to retirement. When they retire they are out of there.

 

[kenw]

"I will not live more than 30 miles from work, it is what it is..."


then that's the price you pay. no argument here, I drive 38 one way daily across Houston. It bites but moving is out of the question. We suck it up.

 

[JHZR2]

OK, here is an example. I made it up in excel, and considers how much you need to sell your home for in order to break even:

code:

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Cost $200,000 Buy Date 10/3/2005

Interest 30y $231,670 Sell Date 10/3/2035

Prp txs $150,000 Req'd Annual PY Inc @ 2005$ 6.86%

Maint $30,000 2% infl 2035 price $1,107,956

TOTAL $611,670 Req'd Actual PY Inc @ 2035$ 15.13%

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So, let's assume you get a place that is 200k after down payment, to make the numbers simple. No PMI, just interest, and you take the whole 30 yars to pay it off.

To break even, the property needs to appreciate at 6.86% before inflation (i.e. all 2005 dollars) Assuming that inflation takes away 2% of the value, you need to sell the home for $1,107,956 in 2035 dollars, which comes to the need to make a 15.13% annual increase to break even.

Maybe thats not correct... but I used standard formulas.

Now, using the same formulas, lets say that you get 30c back in tax refund per dollar you spend on maintanance, property tax and interest. the numbers look like this:

code:

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Cost $200,000 Buy Date 10/3/2005

Interest 30y $231,670 Sell Date 10/3/2035

Prp txs $150,000 Req'd Annual Inc @ 2005$ 4.80%

Maint $30,000 2% infl 2035 price $884,251

TOTAL $488,169 Req'd Actual Inc @ 2035$ 11.40%

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Seems to me that even 4.8%, not counting inflation, is hard to sustain long-term...

Now, when I buy a place, I will do a biweekly payment schedule, and pay it off as fast as possible. SO that would cut into some of the interest costs... But I'm not sure that even if I paid it off in 15 years, that it would be possible to have enough of a sure thing price improvement to realize a real gain.

Please help me see where Im looking at this and going at it wrong - right now it seems that unless you are getting someone else's money to pay for the property, at least im part, you arent going to make any real $$$ in time.

Thanks,

JMH

 

[JHZR2]

quote:

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Originally posted by kenw:
"I will not live more than 30 miles from work, it is what it is..."


then that's the price you pay. no argument here, I drive 38 one way daily across Houston. It bites but moving is out of the question. We suck it up.

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Yes but people arent dumb or necessarily making foolish financial decisions for wanting to live closer, especially with fuel over $3 per gallon (i'm not saying that you mean it this way, Im just commenting).

This is almost an academic exercise in determining the ability to pull a profit on a home, long term. It would be the same unless (a) there are poor schools or everything is heavily regionalized, to cut back on property taxes (b) interest rates approach zero (c)home prices appreciate at double digit rates indefinitely

None of those are good options. And, the results are proportionately the same, whether youre buying a $100k house or a $1MM house. The one difference is that, for all intents and purposes, id be willing to bet that more or less everyone's income is more or less the same, and thus, it would be easier, as a whole, for someone earning, say an average of $75k to pay off a $150k home faster than a $200k home, and MUCH faster than if same bought a $300k home. THis would change how much interest that person paid overall, but it would not change THAT significantly the numbers and appreciation requirements, at the end of the day.

JMH

 

[pitzel]

Generally housing is a depreciating asset unless you happen to be one of those very lucky few who own housing in a prime location that sees huge increases in its value.

One really needs to look at housing in terms of its return on investment, given the amount of leverage possible, and compare to the alternatives. Almost always, investing in sound businesses, or a conglomeration of businesses (ie: broad ETF's, etc.) will, over 10-20 year intervals, yield far higher returns than would the equivilant investment in personal housing.

Of course, rental housing can be of poor quality, and in many locations, really isn't a realistic option if you have a family, or otherwise require a lot of stability in your lives, or have a mechanical hobby or home improvement hobby.

 

[JHZR2]

that is my opinion as well!!!

IMO there is too much hype of how well youll do buying a home... I think youll be lucky to make money on it.

Its the other reasons why you buy a home.

JMH

 

[keith]

quote:

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Originally posted by JHZR2:
OK, here is an example. I made it up in excel, and considers how much you need to sell your home for in order to break even...

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Your comparisons are owning a home versus living for free. Let's say you rent a house for $1200/month, on the low end for where I live. That's $14,400/year. The rent goes up annually 2% (also on the low side), for 30 years.

Total rent payment - $584,000

At the end of that road, you have zero in assets. If you are able to bank the difference between rent and buying, rather than spending it on boats and whatnot, you can do well but that is more fiscal discipline than many can handle.

I worked one full time job and two part time jobs, plus my wife working, to pay off our house in 7 years. It can be done, but it's a big sacrifice. Looking back, it was worth the effort because it sure isn't getting any easier as I get older.

 

[kenw]

the only reason to maximize the term is if you have a better place to invest your money. If you assume your house will go up 10% per year, but 15% investments are fairly easy to find, stretch out the payments on the house, put the extra into 15% markets each month and be ahead in the end. It requires a lot of luck, a boatload of faith and more discipline than most can muster.

It was common in the 80s and 90s, and still holds true today except that it is difficult to find a fund or any investment that will beat housing appreciation. We may find a few soon if the bust happens that so many predict.

 

[JHZR2]

keith,

good point, you have to live somewhere... and in the end youll break even or be close, vs. having just lost 584k...

JMH

 

[H2GURU]

I bought my house a long time ago and it has appreciated quite nicely, however, unless I am willing to live in an old refrigerator box I cannot truely enjoy these gains as profit would just be poured into another home. The only way to make a real money gain would be to move from an area that has realized its gain and has hit a ceiling (THE NORTHEAST),and move to an up and coming area like Myrtle Beach and ride up on those gains. Much easier said than done. IMHO any gains on just the purchase of a single residence are only really good for your HEIRS.

 

[drm7]

H2: I think the trick is to trade up a couple times before retirement. My dad, back in the 80s, told me that all his engineering buddies were buying $250,000 homes. That's probably like $500,000 homes now. He bought for under $100k. His last house was $85k. Well, he just retired and remarried. He sold his house for $150k. That's only $65k gain in 12 years. I'm thinking his friends in the $250k homes made $250k++ when selling theirs. You can use $250k to buy a smaller retirement home and pocket the difference tax-free. This is my current plan.

 

[pitzel]

quote:

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Originally posted by drm7:
H2: I think the trick is to trade up a couple times before retirement. My dad, back in the 80s, told me that all his engineering buddies were buying $250,000 homes. That's probably like $500,000 homes now. He bought for under $100k. His last house was $85k. Well, he just retired and remarried. He sold his house for $150k. That's only $65k gain in 12 years. I'm thinking his friends in the $250k homes made $250k++ when selling theirs. You can use $250k to buy a smaller retirement home and pocket the difference tax-free. This is my current plan.

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But what did he do with the balance of the money he saved? The $150k?

Had he invested in a S&P 500 index fund, over that same 12-year interval, at 12%/year, he would have nearly $600k in the account, plus still own the house.

Yes he would have to pay capital gains tax if ever he withdrew the money, but obtaining a tax-free mortgage against stock market holdings isn't hard for tax-free cash, and he wouldn't have to pay property taxes/heating/cooling costs and upkeep on a larger house either.

 

[chiks]

quote:

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Originally posted by kenw:
"I will not live more than 30 miles from work, it is what it is..."


then that's the price you pay. no argument here, I drive 38 one way daily across Houston. It bites but moving is out of the question. We suck it up.

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or find work closer to home...like i did.