Friday, November 15, 2013

The dilemma of buying a house

Ask youself, what is the purpose of buying the house:
1.       For kids’ education.
2.       For a better living condition.
3.       For a convenient commute.
4.       For investment.

If you are the fist time buyer, better read this book:
House buying for dummies.

I will talk about all the cases here.
Assume buying a 1M house, down payment is 20%, 200K.
For the best investment in the past 10 years,  buying a house in Palo Alto, 
now it is worth 1.6M. With interest rate 4%, the mortgage per month is $3800
. For 10 years, one pays 600K. The rental for this house is around 3000 per 
month, comparing with renting vs buying, one pays 40k per year for rent and 
400K for 10 years.  The agent fee is around 5% including buying and selling.
. Property tax over 10 years is 100K.  

Case 1, put down payment 200K, and sell the house at 1.6M and live there,  
one gets 300k.
(1.6M – 1M – 100K(property tax) – 100K(agent fee) –  ($3800-3000))*12*10
As one lives there, for the first earnings 250k from the house, one doesn’
t need to pay tax.  

Case 2, put down payment 200K, and sell the house at 1.6M as a rental 
property,  one gets 300k. 
From the money view, it is same as the case 1, but one needs to pay long 
term capital gain on the earnings. 

Case 3, put 200K in S&P 500, one makes 400K. 
One can sell or hold. If sell, pays long term capital gain, but one can sell
when one earns less money and pay at lower tax rate.
Case 4, one buying house with cash as a rental property, sell at 1.6M, get 
1.6M - 1M – 100k(agent fee) – 100k(property tax) + 400K (rental income) = 

Case 5, one have 1M put on S&P500, it would have been doubled for the past 
10 years. One gets 1M.

Case 6, one have enough money and just pay off the house and live there, it 
is not an investment. One just wants to enjoy and live a luxury life.

The thesis here is:
Case 1 is not so bad comparing with case 3, as it leverages on the borrowing
money, paying less income tax, getting into the market earlier. Also, it 
provides better living condition for the family and better education for the

For investing on a rental property, assume the housing price increases still
at 30% for 10 years, to beat the S&P 500 doubles every 10 years, the rental
return should be higher than 5%. If one believes that the increasing rate 
of house price is bigger than 30% over 10 years, one can expect a lower 
rental return to beat S&P 500. 

If one has mortgage on the house, it is better the rent can fully cover the mortgage and all the maintenance cost. It will be better that the rental unit brings positive cash flow. When there is an economic crisis, one may lose job and have the tendency to sell the house. Usually it is the worse time to sell the house, as the housing price could be lower than one has paid before. If one sells the house at low, one not only loses the money at the selling point, also loses the opportunity to recover or gain the growth while the market comes back. I have seen this happens to a lot of people. Don't be so greedy. Just borrowing the amount of money at one's comfortable zone. Considering the situation with single income or no income at all. Keep enough savings for 1 or 2 years livings.

Some statics comes from:


  1. Providing Bangladesh Garments Exporters, Bangladesh Garment Factory and Industry, Bangladesh Clothing Manufacturers and Bangladesh Textile Industry List.

  2. Hi there,I liked the way you put together everything, there is certainly no need to go any further to look for any additional information. You mentioned each and everything that too with much of ease.
    House Buyer

  3. Thank you for sharing the insight! Your article is very helpful and informative. I would like to read more updates from you.

    Tax Specialist