The Ugly Truth About Real Estate as an Investment


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Guy A

You make $75,000 per year.

You go extend yourself to buy a $425k house with a monthly mortgage of $2,000/month.

$1,400 of this mortgage payment is all interest payments. Total monthly expenses however, with maintenance, insurance, taxes etc is $3,300.

You go to file taxes in April. You do the math and you realize the total you spent on mortgage interest was $16,800 during the tax year.

To be able to take the mortgage tax deduction, you have to itemize. To itemize it means you can’t take the $6,300 standard deduction every single person in America is able to take.

So you deduct $16,800 from your gross income instead. (which is more)

Assuming (to make this simple) you are taxed at a flat 25% on your then taxable income of $58,200, the total taxes you owe are $14,550 for the previous year.

Guy B

You make $75,000 per year.

You pay $1,600 in rent each month.

You didn’t sign up for a mortgage, so when you file taxes, you take the standard $6,300 deduction leaving you with $68,700 in taxable income.

Your taxes paid for the year are $17,175 based on a simplified 25% tax on your income.

Summary:

Guy A pays $39,600 per year for the ability to pay $14,550 in taxes.

Guy B pays $19,200 per year for the ability to pay $17,175 in taxes.

Who has more money at the end of the year?

If guy A’s house appreciated at the national average of 3% ($12,750) would the answer change?

If you factored in the $150/month in gas saved for Guy B living closer to work and/or school, would the answer change?

If you factored in the downpayment being invested in the market instead ($12k) as well as the difference in the amount Guy B doesn’t have to pay in real estate expenes each month ($1,700), who has more money over 5 years?

(Note: guy A would have paid down his mortgage by $52,500 and possibly have $63,750 in appreciation in year 5. $1,700/month + $12k initially invested becomes $155k in 5 years in a low cost index fund.)

What about over 30 years?

(Note: over 30 years the $425k house would become an asset worth $1,031,586 vs the renter’s portfolio of $3.6million)

Assuming everything above stayed constant and Guy B paid an additional $800k in rental increase over those 30 years, who would have more money?

If Guy B used his higher cash flow to start a business that began netting him $260k/year during his 3rd year in business, then bought a similar house to Guy A in year 5, assuming the price of the house went up 3%/year, who would have a higher income?

Which one is likely to translate into a higher net worth to pass on to his kids?

Filed under: things Black folks don’t want to discuss.

 

(Don’t worry, we know you wont do the math on any of these. Its why you still think Jordans are investments lol

Black people love using words and feelings in place of math when making “investment” decisions.)

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