Not in a 3 year period you don't build much equity. Equity is built more in the later years. After the first 3 years, on a 188k house at 6% interest over 30 years they will have accumulated a little over $5,800 in equity. Less than the realtor fees would be (except this was a direct sale). Not nothing, but at that point well worth crunching the numbers on renting vs. buying.
In a reasonable market where house values just track inflation, you don’t build much equity though.
e.g. If you buy a $200k house with 20% down at 2% on a 25-year amort, over five years you accumulate about $26k in equity not counting your down-payment. In my jurisdiction, standard realtor fees on that would be about $10k, going with the 1% rule of thumb for maintenance would run you another $10k, and property taxes would be another $6k. You’re already at zero net profit before you even have to pay insurance or utilities. (All that isn’t to say that you wouldn’t have lost more money renting.)
Right. Closing costs alone could eat away at 1-2 years of equity. You won't realize gains from a sale until the 5-7 year mark (not withstanding the last few years of fu*kery)
You're right about not getting much equity (unless the market keeps going up!) The videos says, "Hardly anybody stays in a house 30-40 years anymore. In fact, the average is 7 years before sell and move on." After 7 years you would pay about the same in interest, but close to 50% less towards the principle.
Err, no. Building up equity is not the same as appreciation. It's basically a savings plan. This assumes that the property values remain sane and rational, not that they will constantly grow.
If the house appreciates then you get that money at sale no matter how long you've paid into it or how much equity you have.
Unless you are taking that equity out via home equity loans, it doesn’t really matter until you sell. My home went up 18% this year but…so what? It’s not like we are leaving anytime soon. It’s just a paper gain that could be gone next year.
5% of market value, 4-6% brokerage fees, ~3% transaction fees, ~1% in switching costs (double-rent), adds up to most of the home equity most people have.
Even if your home value doesn't increase whatsoever, you are still progressing dumping a higher and higher percentage of your monthly housing-related payments into the equity (payments are interest-heavy early on, shifting to principal-heavy later on). In 15-30 years, you have a paid off house that's worth what you bought it for which can be millions. Or you can leave in a handful of years and take the 100,000s of equity with you that will buy you house in cash in most of the country. Either way, you're hardly worse off.
I thought average was around $1m, but that's even more "wow" at $3m+.
I guess I can see how if you get in early, the property can really appreciate. I've seen that to an extent with my house going up 10% in a couple years of ownership.
With spending 300k seven years ago what is the value of the property now? Would't be surprised if it's 600k+. Let's assume you put 60k into downpayment and maybe you've gotten another 40k in principal put in from payments. That's 400k of equity you can put into a new place.
Sure this is technically option 2, but it's not as terrible if you compare to people that are buying now without having equity grown for years to help purchase.
Yes that’s true but the $500k goes pretty far. You add all previous home improvements to your cost basis and then deduct real estate agent fees. You can have a million of paper appreciation and not pay very much cap gains tax on it.
But that last portion "(net of interest and other costs)" is my argument. Interest, property taxes, capital gains taxes, real estate agent fees are all apart of the cost of owning and selling the asset and it usually adds up to quite a bit. Within the first 5 years even with a 3.5% loan you pay around 20% of your mortgage balance just in interest.
> Between the 4.5% interest plus 1-2% property tax realized every year, you hope that your property value rises by 5.5-6.5% every year before you break even.
A house doesn't need to appreciate 6% to be a good purchasing decision. Not having to pay rent is most commonly the biggest advantage to buying a house.
It's surprisingly hard to beat investing in real estate in growth markets like SV because of the leverage afforded by the ratio of down payment to home price....
For example in Los Gatos, appreciation has been 5% on average for many years, and so the 200k you put down on a 1m house will typically appreciate by 50k. 25% roi in year 1, increasing each year. Of course, property appreciation doesn't happen in a straight line, and houses cost money to maintain (property taxes, etc) but the larger point is valid.
Probably depends on the market. In California, holding costs are ~1.5% per year (or less if the home has been held for many years), and purchase prices can certainly fluctuate 5% in a Fairly arbitrary manner. Also, since nearly everyone is leveraged, even a 2% sale price increase will have a bigger effect on return on equity.
As a followup to my previous comment—we've lived in this house for over 13 years, and own it outright. If we had lived here only a few years, and had no real equity in the house, that would probably change the equation considerably.
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