Quote:
Originally Posted by disneysteve
That is true. The reason people can get rich with real estate, however, is leverage. Let's look at two scenarios.
1. Invest $25,000 in stocks. Have them appreciate by 10%/year for 5 years. You will end up with about $40,000 (before taxes and brokerage expenses). You've made a profit of $15,000.
2. By a $250,000 rental property with 10% down, thus investing the same $25,000 initially. The rent collected covers all expenses to a break-even point. The property appreciates at 5%/year. After 5 years, you sell the property for about $320,000. You've made a profit of $70,000.
So the real estate investment beats the stock investment by $55,000 even though the growth rate of the stocks is double that of the real estate.
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A few things you didn't take into consideration here. First off, take 6% off the top of that $320,000 in realtor fees. That amounts to $19,200.00.
Second, you need to factor in the added costs of homeownership in property taxes and homeowners insurance. Using your $250,000.00 purchase price, I would conservatively estimate you would be paying about $4000/year in property taxes, and about $1200/year in homeowners insurance. Pay that for five years and you are out another $26,000.
However, you do get tax benefits with homeownership by being able to deduct your property taxes and interest payments on your loan. Figuring a $225,000.00 loan at 6% over 30 years, you will have paid $65,311.62 in deductible interest and $20,000.00 over that same 5 year term in property taxes. Assuming you are at a 28% marginal tax rate, that is a tax savings of $23,887.25.
So, you are out $26,000.00 in homeowners insurance and property tax costs, but you also theoretically realize $23,887.25 in tax savings. So you are out about $2,112.75.
Now lets take a look at home maintenance costs. Most experts tell you to budget about 2% of your homes value each year for home maintenance costs. Using the initial $250,000.00 purchase price, that is about $5000/year. Take that over five years, and you are looking at $25,000.00.
So, you start off with a $70,000.00 profit after an initial $25,000.00 down payment on the home. After taking Realtor fees, homeowners insurance, property taxes, and home maintenance into consideration, you are left with only $23,687.25 in actual profits, much closer to what you would get in any other investment.
Here's the thing. For every hot real estate market in America that will actually appreciate at the level your example did, there are 25 more where they didn't. In those cases, after you take out the added realtor, property tax, homeowners insurance, homeowners association, and home maintanence costs, most are left barely breaking even if that.
Owning a home is still a priority with me and always will be for other reasons, but certainly not as an investment or mechanism to make money. It's too much of a crapshoot given all of the extra hidden costs that most don't account for and the fickle nature of the residential real estate market.