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%.