Real estate Math behind it

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Real estate Math behind it

• Saikrishnan G

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Realtors free workshop

• For the consumption of gullible audience only
• Simple and sweet
• For every complicated problem, there is a simple
  solution that is wrong ?

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What is Realtors logic?

• A 250,000 property with 10 appreciation in 2
  years ? 275,000 selling price
• Since the down payment is (often) 10, a 10
  increase in property increased your principal by
  100
• Dont take it with a pinch of salt but a bucket
  of salt (What happens if 10 depreciation
  happens?)

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What they are not telling you

• Who pays the mortgage interest?
• Home equity darling ?
• HoA Whaaaat ?
• Property tax !!!

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Opportunity Cost

• Opportunity cost of X
• Ceteris paribus
• what is the extra cost incurred through
  undertaking venture X ?

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Opportunity cost / year

• Mortgage interest (100 of Interest)
• Home Equity (100 of interest payment)
• Home owners association fee
• Property tax
• Moving charges, penalties
• Garbage disposal fees
• New purchases (fridge etc.,)
• Tax1
• Extra electricity bill, gas bill etc.,

• Rent (liberally prorate the increase in rent)
• Tax2

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Lets put some numbers

• The subtraction of costs incurred on LHS and RHS
  is the opportunity cost of buying a home.
• If this amount is 15,000 this implies that you
  are paying 15 grand / year as the price for
  owning a home

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What happens to the principal ?

• We added the mortgage interest only but not
  principal
• The principal (in P I) you pay goes towards
  YOUR equity on the home
• i.e., Had you paid 1000 on principal, and the
  house price didnt increase at all, when you sell
  the home you will get 26000 (25000 down 1000
  principal)

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So.. How does one account for the principal paid ?

• If you had paid 1000 towards principal in a
  year, the opportunity cost is
• The SP 500 return on the 1000 for that year
  (Vanguard 500 index)
• Lets say 8 is the return that year ?
  Opportunity cost on principal 70

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Total opportunity cost

• Opportunity cost interest and other expenses
  calculated in slide 7
• times
• (1 SP 500 ret)num_yrs
• Plus
• Opportunity cost of principal calculated in slide
  9
• Number in our example is (15000 1.08) 70
  16270

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Are you making a profit ?

• Home Sale price
• Less Brokers commission (5-6 of the sale price)
• Less Outstanding mortgage and home equity loan
• MUST be greater than TOTAL OPPORTUNITY COST in
  slide 10

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Armed with this knowledge