Quote:
Originally Posted by michigan
This is exactly what I am thinking. The only problem left for me is that I still don't understand why not to invest in the stock market in this case. If the "pre-build" price is not cheap but rather fair and you do want to invest long term the stock market should provide you with the same 7% average return + no headache of finding tenants, etc.
I guess if you are a real estate agent then you'd prefer buying real estate partially because you are overconfident in your ability partially because you can save something on the property management (rent ads, etc)
What do you guys think?
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From my perspective (a regular hard-working professional);
-1- If I index the stock market for inflation, how much would I have really made over the past 30 years?
-2- Through rent income, I have the opportunity to build equity using other people's money. Because everybody needs a place to live.
Let's assume that 7% per year in a general DOW mutual fund - for the sake of averages.
In 25 years, that $150,000 ~= $814,000.
With a renal unit worth $360,000 you'll mortgage $210,000 (with your $150,000 down). Let's assume that rent over that entire period covers 92% of the costs (11 of 12 months). Let's also assume a solid 6% interest rate on the mortgage throughout the period. Another assumption, is that the costs over that period are constant at about ~$2000 ($1350/m mortgage + $320/m maintenance + $333/m taxes). I realize that there are other expenses however, I also believe a solid 7% from the stock market is a bit of a fairy tale - unless you want to make it your full-time job. Of that $2000, your penalty will be $30000 8%*$2000*12*25) for the entire 25 year period.
Our final assumption - real estate will appreciate at a rate of 4% per year for the entire period.
$360,000 => $959,000 less carrying penalty of $30,000 => $929,000.
Further, as pointed out by others, there are other costs of ownership, and sale. All-in-all, you're breaking about even or very slightly behind with your 7% gain on other investments versus 4% in real estate.
Acquisition costs -> 1.5% of purchase = $5400
Disposal costs -> 6% of sale ~= $46,000
Income taxes owed on $210,000 gained from others toward principle payments ~ $73,000
With the market, I feel like I'm gambling in a Casino. With Real Estate, my gamble is that people will always need a place to live.
This is definitely a bit off topic. My apologies.