UnThreaded | Threaded | Whole Thread (13) | Ignore Thread Prev | Next
Author: qazulight Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 13972  
Subject: Re: Affordable or Market-Priced Home a better de Date: 11/26/2012 6:49 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
Dan,

I am not a professional, but 2% on cash is not a great deal of money, however, 2% leveraged is 20%. Now the down side to the leverage is you will pay more the 2% in interest. However, if you were going to borrow the money anyway, then the interest is wash.

Here is the way I might figure it, others probably will differ.

280,000 house.

100,000 dollars down, finance 180000 at 3.5 percent.

Leaves you with a Principle and Interest Payment of 808. Your taxes will be roughly 2 percent or 5600 a year. So you can add about 450 a month to that for taxes. So roughly 1250 a month. For this if the house goes up 10 percent a year for 5 years the value would be about 420,000 dollars or a gain of a 140 percent on your initial investment. However, you also need to include P & I and taxes. So you add 75000 dollars to your investment, meaning your gross return without figuring the time value of money made as payments is somewhat less. For rough calculations just toss the 75,000 in with the 100,000 down payment and you get a return of about 80 percent in 5 years.

Now let us look at the less expensive home. It is a 180,000 dollar home. But, you will need to put 20 percent down to avoid PMI. so you need to put in 36,000 dollars. This will leave you with a mortgage of 144,000 and Principle and Interest Payments of 646. Your taxes will still be about 2 percent so you are looking at taxes of about 3600 a year, divide that 12 and add the 300 a month to your payments and you get roughly 900 a month. (I expect the difference in insurance to be small.)

So, now you figure a max of 10 percent return, (2 percent per year times 5 years) and you get a home value of 198,000 dollars for a gross profit of 50 percent on your 36,000 dollar investment. When you add in the payment, you get 54000 in payment and a 20 percent return on all the money you invested.

Of course if you change the assumptions you will get different results. If it were me, I would put the two scenarios into a spreadsheet and massage the numbers for a while.

Cheers
Qazulight
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (13) | Ignore Thread Prev | Next

Announcements

Pencils of Promise - Back to School Drive
"Pencils of Promise works with communities across the globe to build schools and create programs that provide education opportunities for children."
Post of the Day:
Value Hounds

Considerable Headwinds for Profire Energy?
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement