This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

How to Make Your Real Estate Make Sense

NEW YORK ( BankingMyWay) -- A house is a home. No, it's an investment. OK, then, it's both.

And that's problem -- a muddled view that can be used to rationalize an unsuitable property. If the home's too expensive, we figure, well, it's a good investment. And if the value isn't rising as we'd hoped, we say, well, it's a good home. In fact, the property may not be serving either purpose as well as it should.

Disentangling these two functions is key to making the homeownership decision more rational. That's becoming more important as some experts warn about a new housing bubble, at least in some parts of the country.

"Bubble Fears Emerge As Experts Predict Home Value Appreciation Will Remain Above 5 Percent This Year," proclaims the headline on a recent press release from Zillow (Z - Get Report), the mortgage and home-selling website. Zillow said its survey of 105 economists unearthed growing concerns that low mortgage rates will push home prices up too fast. If a bubble follows and bursts, homeowners would be left underwater -- owing more than their homes are worth.

To avoid this, you can keep the home you already have or rent instead of owning. But renting means you don't build any equity. So how do you figure how much of your home expense is an investment that will grow in value and how much is the cost of shelter -- a cost you'd have whether you rent or own?

Actually, it's fairly simple. The investment portion of your cost is the down payment and principal portion of the monthly payment, plus the cost of major improvements. That's the money actually put into the home you hope to get back after a sale, plus gains from appreciation.

For the investment to pay off, the value must grow enough to leave you with more than you put in, accounting for costs of buying and selling such as the real estate agent's commission, real estate transfer taxes, legal and document fees and so on.

Imagine you'd bought a $300,000 home with 20% down and 4% for transfer tax and other purchasing expenses -- an initial investment of $72,000. Now assume you had a 3.5% loan for 10 years and put the home on the market. Your investment would come to $126,176 -- the initial $72,000 plus $54,176 in principal through your monthly payments. (In other words, your loan balance would have dropped from $240,000 to $185,824.)

If the home sold for $400,000, you'd pay $24,000 in commission, plus, let's say, $3,000 in other costs, so you'd net $373,000. After paying off the loan balance, you'd have $187,176. So you'd have made $61,000 on your $126,176 investment, or about 4% a year.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
Z $100.66 2.40%
AAPL $132.73 1.90%
FB $82.60 1.30%
GOOG $562.50 -0.45%
TSLA $234.59 7.40%

Markets

DOW 18,139.63 +59.49 0.33%
S&P 500 2,124.59 +6.90 0.33%
NASDAQ 5,115.3320 +23.2470 0.46%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs