New ask Hacker News story: Ask HN: Purchasing real estate property doesn't seem to make financial sense
Ask HN: Purchasing real estate property doesn't seem to make financial sense
4 by chenster | 5 comments on Hacker News.
Simple math: Suppose I purchase a home for $1 million, with a 20% down payment and a 30-year mortgage term. Interest rate = 5% + Property tax = 1% + Maintenance = 1% ------------------------------------------------- = Total annual ownership costs of 7% Over the 30-year ownership period: Average annual home appreciation in America is 5% - Annual inflation rate is 3% ---------------------------------------------------------- = Net annual gain of 2% These figures are approximate, and in reality, interest rates and inflation tend to be higher. Problem #1: Tax & Maintenance Over 30 years, one would end up be paying over $1 million just in interest and taxes, not including other expenses like maintenance & insurance. Even if the house is fully paid off, the 1% property tax plus 1% maintenance offset the 2% annual gain, resulting in a nearly break-even scenario. Given the current inflation rate (roughly 7%), owning real estate may not be profitable. Problem #2: Capital Gain Tax & Costs to Sell Also, remember there are capital gains taxes for profits over $500,000 upon selling the house, and closing costs typically amount to 5%-6%. Problem #3: Inflation After 30 years, the property value would appreciate to about $4.3 million. Looking good? Not so fast! By taking inflation into account, that $4.3 million is roughly just $1.9 million of 30 years ago, so the net profit is -$100,000. Conclusion Adding the costs of maintenance approximately 1-2% annually over 30 years, the total expenses would likely reach around $400,000. This brings the overall profit to -$500,000 after three decades of homeownership. Not a favorable outcome. In my opinion, tax benefits are minimal (with a maximum annual deductible of $10,000), and the capital gains tax on $2.8 million would be roughly $850,000 (including federal and state taxes), resulting in a total profit of -$1,350,000. Nonetheless, why would anyone choose to invest in something that could potentially incur losses of up to $1.3 million over 30 years?
4 by chenster | 5 comments on Hacker News.
Simple math: Suppose I purchase a home for $1 million, with a 20% down payment and a 30-year mortgage term. Interest rate = 5% + Property tax = 1% + Maintenance = 1% ------------------------------------------------- = Total annual ownership costs of 7% Over the 30-year ownership period: Average annual home appreciation in America is 5% - Annual inflation rate is 3% ---------------------------------------------------------- = Net annual gain of 2% These figures are approximate, and in reality, interest rates and inflation tend to be higher. Problem #1: Tax & Maintenance Over 30 years, one would end up be paying over $1 million just in interest and taxes, not including other expenses like maintenance & insurance. Even if the house is fully paid off, the 1% property tax plus 1% maintenance offset the 2% annual gain, resulting in a nearly break-even scenario. Given the current inflation rate (roughly 7%), owning real estate may not be profitable. Problem #2: Capital Gain Tax & Costs to Sell Also, remember there are capital gains taxes for profits over $500,000 upon selling the house, and closing costs typically amount to 5%-6%. Problem #3: Inflation After 30 years, the property value would appreciate to about $4.3 million. Looking good? Not so fast! By taking inflation into account, that $4.3 million is roughly just $1.9 million of 30 years ago, so the net profit is -$100,000. Conclusion Adding the costs of maintenance approximately 1-2% annually over 30 years, the total expenses would likely reach around $400,000. This brings the overall profit to -$500,000 after three decades of homeownership. Not a favorable outcome. In my opinion, tax benefits are minimal (with a maximum annual deductible of $10,000), and the capital gains tax on $2.8 million would be roughly $850,000 (including federal and state taxes), resulting in a total profit of -$1,350,000. Nonetheless, why would anyone choose to invest in something that could potentially incur losses of up to $1.3 million over 30 years?
Comments
Post a Comment