So I was doing some simulations about financials buy vs rent 1 bdrm condo. Assumptions : 4% inflation (maybe a little bit high but I added the Bernacke factor), 8% stock market returns, $1M place (to maximize tax deductions) 35% tax bracket, 30 yr mortgage, 6.5% interest. Estimated RE price appreciation 4-8%. It seems that the optimal sell time is about 8-10 yrs or > 30-40 yrs. At RE... [more]
So I was doing some simulations about financials buy vs rent 1 bdrm condo. Assumptions : 4% inflation (maybe a little bit high but I added the Bernacke factor), 8% stock market returns, $1M place (to maximize tax deductions) 35% tax bracket, 30 yr mortgage, 6.5% interest. Estimated RE price appreciation 4-8%.
It seems that the optimal sell time is about 8-10 yrs or > 30-40 yrs. At RE appreciation of about 4-6%, selling at 8-10 yrs is close to the cost for renting a 1 bdrm, or a few hundred dollars a month cheaper. It is when you hit a price appreciation of 8% or greater when the costs to own plummet and you really start to make money.
So during the past 4-5 yrs where average RE appreciation is > 10%, it is fantastic to own. The questions is what is the expected appreciation in the next 5-10 years?
Anyone else done similar calculations? Suggestions to further refinement of the model? Bad assumptions? Thanks.
[less]
I think the weakness of the NY times calculator is that it doesn't take into account the tax deduction savings. That is why I am finding an optimal sell time at 8-10 years b/c of your decreasing tax savings from interest. Depending on the variables, on some simulations I found the optimal sell time to be closer to 6-8 years.
Ignored comment.
Unhide
Response by ebabrah
almost 18 years ago
Posts: 79
Member since: Oct 2007
Your mortgage rate could be too high. Depending on how much you want to put down, you could qualify for a conforming loan if the bill being proposed goes through. Right now 30yr mortgage rates for conforming loans are around 5.5%.
Ignored comment.
Unhide
Response by aboutready
almost 18 years ago
Posts: 16354
Member since: Oct 2007
The only variable I can see that you're missing is whether any re taxes send you into the AMT. I personally don't see there's any real pressure to buy immediately If you find a place you really love and you can definitely see yourself living there for five to ten years, then go for it Otherwise, I would say wait until you can say that.
Ignored comment.
Unhide
Response by aifamm
almost 18 years ago
Posts: 483
Member since: Sep 2007
If you plug numbers into a calculator like the nyt one, you will probably see that you would break even after one year of 10% appreciation.
For kicks for the bears, I'd like to know:
If the appreciation was flat 0% for x years, how many consecutive years of y% appreciation would it take to breakeven?
a) x=3 years, y=10%
b) x=3 years, y=5%
'/%3e%3c/g%3e%3c/svg%3e)
FYI I find this tool helpful in doing calculations like these: http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html
I think the weakness of the NY times calculator is that it doesn't take into account the tax deduction savings. That is why I am finding an optimal sell time at 8-10 years b/c of your decreasing tax savings from interest. Depending on the variables, on some simulations I found the optimal sell time to be closer to 6-8 years.
Your mortgage rate could be too high. Depending on how much you want to put down, you could qualify for a conforming loan if the bill being proposed goes through. Right now 30yr mortgage rates for conforming loans are around 5.5%.
The only variable I can see that you're missing is whether any re taxes send you into the AMT. I personally don't see there's any real pressure to buy immediately If you find a place you really love and you can definitely see yourself living there for five to ten years, then go for it Otherwise, I would say wait until you can say that.
If you plug numbers into a calculator like the nyt one, you will probably see that you would break even after one year of 10% appreciation.
For kicks for the bears, I'd like to know:
If the appreciation was flat 0% for x years, how many consecutive years of y% appreciation would it take to breakeven?
a) x=3 years, y=10%
b) x=3 years, y=5%