How to calculate this math?

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oem7110
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How to calculate this math?

Post by oem7110 » Tue Apr 29, 2014 2:38 am

I can get 3% return on fixed deposit.

If a house is worth $10000, and I can get 70% mortgage from Bank at 4% interest rate,

I need $3000 as initial capital and borrow $7000 from bank to purchase this house,

Luckly, if I can get $500 rental annually, then I get 5% ROI on rental property, but I need to pay 4% mortage rate, so I get 5% - 4% = 1% net income from rental property.

If the price of house keeps unchanged for a period of time, should I place $3000 on fixed deposit or should I purchase $10000 house for 1% net income annually?

Does anyone have any suggestions?

Thanks in advance for any suggestions :>

fab1usa1
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Post by fab1usa1 » Tue Apr 29, 2014 6:36 am

It depends on what your objectives are:

- If this is indeed rental property then your estimated 1% annual net income will soon turn negative due to the cost of property maintenance and management. Your estimate of zero capital loss is unrealistic. The only way that I would buy this property is for political gain.

- If this is truly a play for income then I would opt to deposit $3,000 at 4% with FDIC insurance.

oem7110
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Post by oem7110 » Tue Apr 29, 2014 8:18 am

fab1usa1 wrote:It depends on what your objectives are:

- If this is indeed rental property then your estimated 1% annual net income will soon turn negative due to the cost of property maintenance and management. Your estimate of zero capital loss is unrealistic. The only way that I would buy this property is for political gain.

- If this is truly a play for income then I would opt to deposit $3,000 at 4% with FDIC insurance.
1% annual net income is based on cash $3000 + mortgage loan $7000, so in term of cash $3000, do you know on how to determine the annual net income based on the invested capital?


Thank you very much for any suggestions :>

rhc
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Post by rhc » Tue Apr 29, 2014 10:20 am

You have $3000 initial capital to put towards you house which could otherwise be invested @ 3% fixed deposit (your figures above)
This means that if you use this initial capital to buy the house you will forgo an annual interest income of $90 (assuming no tax paid)

Now you need to borrow $7000 extra @ 4% = $280 p.a. interest to be paid

Therefore, total cost to you will be $280 interest paid plus $90 interest forgone = $370 p.a.

You say that you might(?) receive rent of $500 p.a.

This means $500 received less $370 paid out = $130 p.a. in your pocket when all is said and done.

So, based ONLY on the figures supplied & the assumption that the house price will not change, the house seems the better option.

Of course none of this takes into account the taxman’s take of rental income received & any negative gearing costs (if applicable) & maintenance costs (if applicable) that you might (or might not) be able to claim on your tax return.

*********

b.t.w, where are these houses for $10k ??
New York, London, Paris . . . . . Detroit ??

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