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You’re not factoring in the money you’ll pay to rent, which although less than your mortgage, will not be making any return for you (it will for the landlord).
Mentor
Or buy a $300k house with $30k down and put the rest in the market. You'll have somewhere to live and the upkeep on a smaller cheaper house is much less.
That lcol home will be the first to lose value. If op has kids it will be in a much worse school district. Appreciation will be commiserate with a house of that price
Are you trying to compare rent vs own? Your own math is missing a bunch of stuff like property taxes and home insurance. On the other hand, it’s pretty uncommon to find a nice 1m house in a suburb for rent, period. And if it was found, it’s probably a good 10% premium to the total cost of owning.
On the other hand yes if you find a nice landlord and decent rent, landlord who has a 2.5% 30 year fixed, you might as well rent.
This is the logic used by large retailers who have 30 year leases instead of owning the real estate. Tax laws changed that they now have to show the property on their balance sheet but effectively the same concept that your 250k can be deployed elsewhere
Also a 30 year fixed at 7% for a 750k loan is 4990. If property taxes are 2%, that’s 20,000/12 = 1667 a month right there. And home insurance is probably a good 2000 a year or more depending on where you are. Plus HOA etc I’m not seeing 5-6k as possible. Good luck
Subject Expert
Some things you’re missing:
- rent paid during the 30 years vs flat mortgage payments
- 7% interest rate isn’t likely to remain for the life of the loan, beyond just interest rates expected to drop in the next 12 to 18 months. Between principal paydown and appreciation, the mortgage becomes less risky as your loan-to-value drops, so you can often get lower rates after 3 to 5 years. A 60% LTV loan is less risky than an 80% LTV loan, so you can often get a rate drop with a refinance.
- homestead exemption - the first $250k in capital gains (if single, or $500k if married) is exempt when you sell. As your home appreciates, selling when you’re under these thresholds is often smart for long term tax purposes.
- adding value - depending on what you hit, and what upgrades you make over the course of your time there, it’s very possible to make a few upgrades and drastically improve the resale value. That may happen right before you sell, but it’s very possible to put $50k to $100k into upgrades and greatly improve your ROI on that money.
Your cash-on-cash returns on the $250k may not be amazing with buying a primary residence and holding it for 30 years… until you start to realize that there are a lot of opportunities to improve that outcome if you pay attention to the details.
on the house, you get a tax deduction on your interest payments, the first $500k of capital gains is exempt, you can refinance if rates drop, you can pay it off faster if your income increases or you get a windfall of cash, and you can borrow against your own equity to make improvements to the property. also, you get to live there.
The money paid for interest, taxes, insurance, and repairs on the home you buy is also "wasted". There is no return on any of these. So if you compare these to renting, you might find the numbers to be rather close overall. Any equity you gain in your home is also meaningless for the most part, because you have to live somewhere. So even if you have a million in equity in your home, that's where it stays. Your primary home is never an investment. It will always be your biggest liability. You can pay on your home for 20 years, fall into hard times, and lose it all.
Invest that 250k into something meaningful and not your primary residence. You will do much better in the long term.
Most people don’t acknowledge this, and many say “oh it’s my security and peace of mind” or “oh but it appreciates and it’s leveraged as the appreciation rate is higher than the interest rate blah blah blah” but completely leave out the factors you’ve shared alongside the return on the downpayment/equity
Cont…
Now if I threw that $250k in the market and did NOTHING else, at an assumptive 7% interest rate over the course of 30 years it would yield $1.9M in capital gains.
Am I missing something that makes the going down the home route more attractive?
Assuming the house doesn’t change in value, the first month your house adds about $1,800 in equity from the principle portion of your mortgage. As the months go by, the amatorization changes, and you pay yourself more per month
Now, contrast that with paying someone else rent in addition to hoping your investment pays you thousands per month
Why spend so much when you can easily by a better home outside your state
Your model doesn’t consider monthly equity building. Every month, that $5-6k pays you equity. Rent doesn’t.
So you have to ask yourself if it’s worth paying yourself several thousand dollars per month
As a homeowner, you also have many rights and protections that are not available to renters, who can be easily evicted if landlord dies or sells property. Rents will continue to rise significantly over next 10 years as older landlords cash out their equity and retire or pass away. We are seeing this in Central FL already where rents have doubled in 3 years. Corporate buyers are purchasing SFH and builders are now selling entire build to rent neighborhoods. Corporations will have the same or higher basis as you but be looking for profit on top.