Friday, March 20, 2015

Example of Home Selling Profit Calculation


PURCHASE

Year house bought: 2005
House buying price: $ 500,000
Downpayment (20%): $ 100,000
Mortgage amount: $ 400, 000
Mortgage term: 30 years



SELL
Year home sold (10 years after purchase): 2015
Home selling price: $600,000
Total mortgage payments to the Principal after 10 years: $ 60,000 
Market value increase: $600,000 - $500,000 = $ 100,000



EQUITY


Equity Quick Calculation:

Total Equity = Down Payment + Market Value Increase + Mortgage Payments
Total Equity = $ 100,000  +  $ 100,000  +  $ 60,000
Total Equity = $ 260,000



SELLING COSTS


Breakdown of the Total Cost of Selling Home (8%):
 a. Sales commissions (6%): $ 36,000
 b. Title and escrow fees (1.5%): $ 9,000
 c. Property marketing preparation costs (0.5%): $ 3,000
 d. Renovation costs: $ 12,000

Total Cost of Selling Home = $ 36,000  +  $ 9,000  +  $ 3,000  +  $ 12,000

Total Cost of Selling Home = $ 60,000



NET PROFIT


Total Profit Calculation:

Total Profit = Market Value Increase - Total Cost of Selling Home

Total Profit = $ 100,000  -  $ 60,000

Total Profit = $ 40,000



YEARLY PROFIT


Yearly Profit = Total Profit / 10 years

Yearly Profit = $ 40,000 / 10

Yearly Profit = $ 4,000



MONTHLY PROFIT


Monthly Profit = Yearly Profit / 12

Monthly Profit = $ 4,000 / 12

Monthly Profit = $ 333



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RENTING for 10 YEARS & SAVING $2000 per month


Yearly Savings = $ 2,000 x 12

Yearly Savings = $ 24,000

Total Savings for 10 years = $ 24,000 x 10

Total Savings for 10 years = $ 240,000



COMPARISON: BUYING HOUSE or RENTING & SAVING


In order to match the $ 240,000 total savings on renting for 10 years,
the market value of the house after 10 years must be 60% greater than the original purchase price.

Calculation Proving:

60% Market value increase after 10 years:


Market value = $ 500,000  x  1.6

Market value = $ 800,000


Market value increase:


Market value increase = $ 800,000  -  $ 500,000

Market value increase = $ 300,000


Net Profit:

Total Profit Calculation:

Total Profit = Market Value Increase - Total Cost of Selling Home

Total Profit = $ 300,000  -  $ 60,000

Total Profit = $ 240,000


Return on Investment (ROI):


ROI = Total Profit / Original Price

ROI = $ 240,000 / $ 500,000

ROI = 48 %


Conclusion:

In order to match the $ 240,000 total savings on renting for 10 years,
the ROI on buying and selling a house must be 48%.

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