Profit on a house

[2moretrees]

I don't understand how people can claim they make these huge profits on their houses. For example, I have a friend that bought a house about 10 years ago for $150k and sold it for $310k last year and she keeps going around talking about the $160k profit she made on the house.

The problem is that she doesn't count any of the remodeling they did, any of the maintenance and upkeep or any of the interest that she had to pay on the loan or the real estate agent's fee just to name a few. It seems on all these house flipping shows they do the math the same way leaving out a lot of the little expenses that cost money.

Am I the only one that thinks this totally makes housing as an investment look better than it really is?

[Seeker]

I don't understand how people can claim they make these huge profits on their houses. For example, I have a friend that bought a house about 10 years ago for $150k and sold it for $310k last year and she keeps going around talking about the $160k profit she made on the house.

The problem is that she doesn't count any of the remodeling they did, any of the maintenance and upkeep or any of the interest that she had to pay on the loan or the real estate agent's fee just to name a few. It seems on all these house flipping shows they do the math the same way leaving out a lot of the little expenses that cost money.

Am I the only one that thinks this totally makes housing as an investment look better than it really is?

Some do, some don't. Technically you are correct. If they exclude expenses, they are not describing the true profit or even if they made a profit at all.

What about the time put into the work of repair? That should also be included, because that is "time" that you could have been earning money doing other things.

On the other hand, if they've held a house for 10 years and lived within while remodeling, and still ended up with $160k more than they paid, they've also "saved" in paying rent as well.

In the end, it's a complex calculation and in order to simplify people will ignore the specifics.

Time is the greatest multiplier of $'s; unless of course, the house was bought at an already inflated price. But even then, the cost of paying rent and losing those $'s forever, may get you more in the long run.

[meatloafkend]

You are right about the house flipping shows inflating profits. Where are the realtor fees, interest costs, closing fees,etc? That being said, there is a lot of money to make in a good housing market. The current economic situation is not the best example, but in a good market, I once read a home's value doubles in 10-15 years. I think that is amazing!

[atomicrc11]

Also, even if they did make a $160K profit, it isn't really $160k. It is a $160K in dollars ten years ago. It could actually be closer to a $120k profit if inflation averaged 3% per year.

[Snave]

Also, even if they did make a $160K profit, it isn't really $160k. It is a $160K in dollars ten years ago. It could actually be closer to a $120k profit if inflation averaged 3% per year.

What? This completely confuses me and I am good with numbers. If they bought it 10 years ago and sold it today for a $160K profit, it IS a 160K profit. Can you explain what you mean?

As for the entire thread, I do agree that you have to add in major rehab on the house and the money you spent. I don't think you necessarily have to take out taxes and mortgage payments for the last 10 years. You would have had to live somewhere. I do think you need to subtract any realtor fees, etc... also.

[LivingAlmostLarge]

There is a lot of calculations from rent, rehabbing, etc.

[scfr]

There does seem to be a tendency for people to inflate the value of their homes, and I don't understand the psychology behind it.

Many people not only overestimate the profit they made on their house but the equity in their current home as well. Real estate agent commissions and sales tax (if you live in a state that taxes home sales) are going to take a pretty good size chunk of what any home seller gets at closing; if people want to know what their home is truly "worth" then they need to deduct what they realistically expect those costs to be from what they realistically think they could sell their home for. If your home is paid for, you think you could sell it for $300K, and you expect costs to be 7% of your sales price, then your home is really only "worth" $279K.

[MonkeyMama]

I live in California where it is common to make a profit of $300k after a few years and 1000% profit after 20 years. (It was anyway, don't think it can stay on that pace!).

So I don't necessarily identify with profit being over-inflated. I know a lot of people made rich off real estate. (No fixing up, not a lot of costs, just buy, hold, sell).

However, in most markets and most areas, yeah, I totally agree. People get all excited about the "profit" but conveniently leave out all the expenses.

[tycho]

Absolute profit vs. relative profit

It is true that the absolute profit of 160k should be decreased by the upfront costs, maintenance costs, and financing costs.

But in finance, the profit should be compared to the amount you invested: at the purchase, for maintenance and for the loan repayment. If your friend took a loan of 100k, she only disbursed 50k of cash at the beginning. Afterwards, over time your friend paid back the loan (the loan was taken for how many years? Probably he/she stopped the loan at the sale). There are many parameters to be taken into account, but looking at it, making 310k by paying 50k + some additional costs sounds great to to me.

Cheers