Hi all
case analysis:
you bought a property for $250K and after a few years sold it for $350K so you made $100K from capital gain. then you're not gonna start renting. so you bought another property for $450K. but it would've cost you only $300K a few years back!
so someone would argue that rather than having made $100K ($350K-$250K) you've actually lost $50K. does this make sense at all? i'm a little confused…
any comments appreciated
ao
Guess add to the arguement about never never sell !!!!
Richard Taylor | Australia's leading private lender
You haven't physically lost money, but the comparison says that you have. You could do that every day with comparisons between a share and a house, or 2 different shares etc, etc – it will drive you mad.
There is really no need to sell the house unless your family is getting too big, or your work requires a move.
But if you must sell, the way to do it is to buy in gloom, sell in boom. Don't buy and sell in the same market.
ao wrote:so someone would argue that rather than having made $100K ($350K-$250K) you've actually lost $50K. does this make sense at all? i'm a little confused…That's quite correct in theory. In practise you won't have 'lost' $50,000 but you will have lost $50,000 of purchasing power. Booming house prices are only good for investors and downsizers. They are bad for people who own only one house and for those who as yet own none.
Another analogy. People often speak of 'getting on the housing ladder'. During a boom, the rungs become further apart. During a correction (real or nominal), the rungs become closer. So if you were to purchase a cheap 'bottom rung' house in the hope that booming prices give you a leg-up to the next rung, you'd be disappointed to find that the boom had left you further from that second rung, not closer!
The opposite is also true. If you own just one house and hope to move to a more expensive house, the very best thing would be for house prices to crash! If say, your $200k house (with a $50k mortgage) dropped 50% to $100k, a $400k house would now be ~$200k. You could now move to the new house with a $150k mortgage rather than a $250k mortgage! You might feel you've lost $100k on the value of your house, but you've actually gained $100k in purchasing power!
Cheers, F. [cowboy2]
Makes pefect sense and is one of my pet gripes!! People LOVE to say how they have MADE $100k etc on the sale of their house but they never say how the new residence they have bought has also increased by x amount lol. That and my other pet gripe of how people say they MADE $100K but they never mention how they actually only made $70k etc after TAX!!!!
I have a query in relation to buying and selling houses in this respect as well. People always mention how much they bought the house for and how much they sold it for – as already mentioned they never take into account the lower amount due to the tax they have paid – but I'm also curious as to why they never include the interest they pay on the loan – if it's their Principal Place of Residence they can't claim any of this as a tax deduction but everyone I know always neglects to take into account the interest they have paid on a property.
For example. I did a calculation today on a $350,000 loan over 30 years at 8.5% with monthly payments – the total paid off (if you have the loan over 30 years) is $968,830.99 – $618,830.99 of that amount is interest payments. Granted the majority of people don't keep a house for 30 years but my thoughts would be that the interest you paid would be proportionate to the legth of time you are paying off the mortgage which on sale would decrease the amount you made on the sale – so why isn't this ever taken into account?
In the above example by blogs it is stated that people say they make 100k which is actually 70k after tax – but if this was my example over say 5 years wouldn't you also have paid approximately 30k in interest so wouldn't this reduce the amount you have made to 40k?
If I'm wrong please correct me but I've always wondered why interest is never taken into account?
Linda
LindaClaridge wrote:I have a query in relation to buying and selling houses in this respect as well. People always mention how much they bought the house for and how much they sold it for – as already mentioned they never take into account the lower amount due to the tax they have paid – but I'm also curious as to why they never include the interest they pay on the loan – if it's their Principal Place of Residence they can't claim any of this as a tax deduction but everyone I know always neglects to take into account the interest they have paid on a property.For example. I did a calculation today on a $350,000 loan over 30 years at 8.5% with monthly payments – the total paid off (if you have the loan over 30 years) is $968,830.99 – $618,830.99 of that amount is interest payments. Granted the majority of people don't keep a house for 30 years but my thoughts would be that the interest you paid would be proportionate to the legth of time you are paying off the mortgage which on sale would decrease the amount you made on the sale – so why isn't this ever taken into account?
In the above example by blogs it is stated that people say they make 100k which is actually 70k after tax – but if this was my example over say 5 years wouldn't you also have paid approximately 30k in interest so wouldn't this reduce the amount you have made to 40k?
If I'm wrong please correct me but I've always wondered why interest is never taken into account?
Linda
Nope you are absolutely spot on Linda. People LOVE to brag and make themselves seem better than what they really are-thats about it in a nutshell!! I too have always been bemused how people 'forget' or NEGLECT to take interest payments into consideration…
It's a bit like gamblers who always tell you about their biggest win or their recent big win. They forget to mention the same amount of money they have gambled (lost) to win it.
I know of rich people who gamble; but no people who got rich from gambling.
LindaClaridge wrote:If I'm wrong please correct me but I've always wondered why interest is never taken into account?Linda
Of course you're not wrong! You're just experiencing 'common sense' rationalism, and believe me, it ain't that common these days! This is exactly why I always tell first-time buyers:
Quote:It looks like you’re stretching to buy the most expensive property you can relative to your income. Why? Do you realise that over the long term it will almost certainly be more financially rewarding to buy a slightly cheaper place and pay it off in half the time?Let’s analyse that more closely. Say you can afford $500pw repayments.
You can:
a) repay a $300,000 loan @ 7.8% over 30 years, 100% financing
b) repay a $230,000 loan @ 7.8% over 15 years, 100% financingFor the same payments you can own outright a $230,000 house in 15 years or you can be still owing over $200,000 on a $300,000 house.
Even if house prices rise 60% over that time, you’d have a fully-owned $368,000 asset instead of $280,000 equity in a $480,000 house.
Please consider NOT over-stretching to buy real-estate.
Cheers, F. [cowboy2]
But hang on; if I follow your advice… how can I keep up with the Joneses??
That's more important – give me the $300k house; I need the double garage to park the Merc 4wd's in.Thanks for clearing that up for me.
I'm hoping to make my first investment in the coming months so the other analogy of the 2 houses 1 slightly cheaper with less interest paid over a shorter period is very interesting. The "cheaper" homes will be where I'm starting.
Linda
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