## Tuesday, April 12, 2011

### Home Owner Math

Many people see home ownership as a chance to make a fortune or (more likely nowadays) a chance to lose a fortune. I'd like to spend a couple minutes looking at the economics of owning a house - with the assumption we only use elementary school mathematics.

This is not a lesson on how to buy a house. I won't tell you about the cheapest mortgage, the lowest down payment, how to get rich quickly, how to save on your taxes, or how to profit from foreclosures.

Instead of following those typical themes, I'll show why even with a hot market area, with low mortgage rates and minimal expenses, you may not make money on a house. Which doesn't mean you shouldn't own one. Just don't give up your day job when you buy one.

Look here:

Now let's add some real numbers to illustrate my point [click the image for a larger version]

Grab a calculator and let's do some math.

INCOME
This house has doubled in value. Over 20 years the gain is about \$375,000 appreciation in value. Add that to the original \$375,000 cost of the house and it's now worth \$750,000. If they could possibly sell, the owners might net \$725,000.

Over those 20 years there could also be a savings of up to \$60,000 in income taxes due to various deductions.

EXPENSE
Even if you are a tight-wad, have a low-interest-rate loan and no association fees or mortgage insurance, the expenses over 20 years amount to \$833,800.

That's an average of \$3475 a month, which could rent a very nice house. Keep in mind the owner's mortgage payment was \$1800 a month.

This does not include discretionary work, furniture, appliances, remodeling, gardening, etc.

I am ignoring the "lost income" from the \$100k down payment. If it had been invested at 5% over the past 20 years, the \$100k would grow to \$265k - a gain of \$165k. At 7% it would have produced a gain of \$287k.

Did the home owner make a profit?