What Is Your Return Investment

Question by hwhitemore: What is your return investment in the house?
Suppose you buy a house for 150,000, one year later, the market price of the house has risen to 165,000. What is the return on your investment in the house, if you make a down payment of 20 percent and took out a mortgage loan for the other 80 percent? What if you made a down payment of 5 percent and borrowed the other 95 percent? Be sure to show your calculations in your answer

Best answer:

Answer by Dave W
I’m guessing this is for some kind of homework assignment, so probably they’re looking for a simple calculation like the following:

A 20% down payment on a $ 150,000 house is $ 30,000 so you invest $ 30,000 and borrow the other $ 120,000. After a year, you sell for $ 165,000 and pay off the $ 120,000 loan leaving you with $ 45,000. So you invested $ 30,000 and got $ 45,000 back after a year – which is a 50% return.

A 5% down payment on a $ 150,000 house is $ 7,500 so you invest $ 7,500 and borrow the other $ 142,500. After a year, you sell for $ 165,000 and pay off the $ 142,500 loan leaving you with $ 22,500. So you invested $ 7,500 and got $ 22,500 back after a year – which is a 200% return!

Unfortunately, in the real world your returns wouldn’t be anywhere near that. In fact if the house price goes up by only $ 15,000 you’d almost certainly LOSE money selling it after a year. First, you’d have to subtract out the closing costs for buying and selling the house (transfer tax, recording fees, various inspections, legal fees, etc.) which would be a thousand or two. You’d have costs associated with obtaining the loan (origination fee, appraisal fees, possibly “points”, etc.) which would be a couple thousand more. You’d have to pay interest on the loan for a year which might be about $ 7000. Unless you sell it yourself, you’d have to pay a realtor fee when you sell which is probably at least another $ 8000-$ 10000.

Buying and selling houses is very expensive so unless you’re in a housing bubble, I think it’s very difficult to flip a house in a year and make a profit (unless you buy it significantly below market value and fix it up to raise the value – or the housing market is in a bubble like it was a few years ago).

Add your own answer in the comments!

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This entry was posted on Monday, February 6th, 2012 at 11:00 pm and is filed under Return On Investment. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

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