## How to calculate this math?

Discussions about Money Management and Risk Control.
oem7110
Roundtable Knight
Posts: 390
Joined: Wed Jul 12, 2006 9:33 pm

### How to calculate this math?

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
Roundtable Knight
Posts: 383
Joined: Sat May 21, 2011 8:30 pm
Location: New York
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
Roundtable Knight
Posts: 390
Joined: Wed Jul 12, 2006 9:33 pm
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
Roundtable Knight
Posts: 464
Joined: Tue Nov 18, 2008 8:46 pm
Location: Oz
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 taxmanâ€™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.

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