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Let’s ball park it. $500,000, 20% down, 30yr fixed, 7% interest. $100,000 down payment. Closing cost 10,000. You’ll pay per month $2130 payment, $400 property taxes, home insurance $180, $300 minimum misc expenses, refrigerator, landscaping, heater, etc. utilities not included because you pay that if you rent. Total $3010 per month, $36,120 per year. Roughly you’d get 5-6k principal pay down, the other 30k goes to bank interest. Appreciation is 3-5% typically but varies by region, it can be -10% or +10%, so you’d pay $36,120 per year to get $15,000-25,000 using the average in appreciation per year. You need a place to live either way though and you tie up $110,000 in cash. If you don’t put 20% down you pay mortgage insurance, extra $200 a month. Many of those costs vary by state, Texas has high property taxes, California has higher home insurance. You have to weigh that against $2,000 per month rent in that same market. You could also model $110,000, adding $1,000 a month, adding a margin account to add leverage to an S&P500 ETF at 11% and see if it beats it. It’s a much lower effort investment and you’ll see renting isn’t a bad deal at the moment. It explains why real estate is slow…
Subject Expert
Is this a house you would live in as a primary residence? Or an investment property?
Are you going to have a mortgage? Or just buying in cash?
There’s a lot of unknowns in the equation, so you’ll have to make some assumptions. Also, there’s talk that our next president will take away the SALT limit, which could help a lot of people in higher cost of living cities with tax deductions. That being said, you probably should stick with some relatively conservative assumptions (2% to 3% appreciation, a healthy maintenance / capex budget, etc) and hope things work out better than expected.
That being said, if you buy a property that needs some improvement and you can tackle those projects over time, that will greatly help the house out-appreciate the average. But would be hard to build into your assumptions.
You should either house hack or rent it out instead of occupying it.
Model cash flows during a 5 year time horizon and then calculate the NPV and compare to your investment. Consider real estate taxes, mortgage interest, insurance, and expect repairs and maintenance costs among the unexpected as well as buying and selling costs.
One way to look at it is you would have to live somewhere during that time. Let's call that your baseline living expenses. Anything less than your baseline living expenses is positive ROI and anything more is negative ROI
Negative ROI
Down payment for loan
Inspection costs
Closing costs
Property taxes
Repair costs
HOA fees
Monthly: Anything above baseline living expenses
Positive ROI
Tax break on mortgage interest
Increase in property value
Monthly: Anything below baseline living expenses
Add negative ROI and positive ROI and you get a net ROI.
Usually over the long run you fade any startup fees with the property value growth. Of course that value is locked up in the property and the only way to extract value from it is to loan against or sell it. If you sell it you still need a place to live.
Because of this the home can be seen as mostly a liability so you should buy just what you need. If you want to turn the real estate into a true asset you need it to generate money without selling it. Renting the space to others or running a business with the space are two common ways to get ROI greater than the residential property value growth rate.
For example: If you can rent for $2.5k but you can buy for $2k a month you are $500 ahead each month you buy instead of rent. However, when the AC goes out, as a renter you call the landlord to have it fixed and when you own you write a $10-20k check to have the AC replaced. "ahead" or "behind" on ROI for a house can change depending on the time period you look at.
A former realtor here suggests another consideration: buy owner-occupied now, enjoy benefits of ownership, and move out in 5 years but keep the property and add another tenant. Pay down quickly after that occurs and build long term wealth by holding.
Cash in and cash out is number 1, If you want to remove rental expense as well that could be a factor (how much you would have paid in rent). Add in to the cash any repairs done in the 5 years and you will see your ROI.