squiffy
09-30-2005, 04:30 AM
Just read in a money magazine online article that Warren Buffett supposedly lives in the same home he bought back in 1958 for 31,500 in Omaha NE.
It was worth about 700,000 in 2003.
Home price appreciation over time in NE is probably a lower rate of return than other states, such as CA and NYC. So it would be interesting to get long term data for other houses in NYC and CA.
Anyway, putting those numbers into various calculators.
Inflation
1958 31,500 home would be worth $210,406.92 if it just kept pace with inflation. So home clearly rose above inflation rate, as calculated by CPI.
http://data.bls.gov/cgi-bin/cpicalc.pl
IRR Internal Rate of Return or Average Annual Yield calculator gives about 7% annual return.
http://cgi.money.cnn.com/tools/returnrate/returnrate.jsp
But you also have to remember, he paid no rent for the 47 years. So he is actually ahead quite a bit and has "earned" more than 7% annually on the home.
Assuming he originally had say a 6% mortgage and 30 year fixed loan, then he was ahead early on, even after considering the cost of borrowing money.
The money cost him 6% a year. But the home was appreciating at a tax-deferred 7%. (Possibly tax free depending on sale or transfer on death rules). In addition, his cost of borrowing was not 6%, but say 4%, because of tax deductions. So even after borrowing costs, he was ahead about 3% a year, not including rental savings.
So one way to look at owning real estate over the long term is this. You pay no rent for the entire time you are in the home, this could be as much as say $1200 or more a month, depending on the size of the home and the going rental rate in your town.
PLUS. At the end of 30 years, you own the home outright, and the home has probably appreciated in value at a rate that is so high that you beat inflation AND beat the cost of borrowing.
So you pay no rent. And you get back all of the money you paid toward the mortgage, plus interest!!!!
In the short run, you are cash poor. But it is like a forced savings. All the money that you paid in, you should get back eventually in home equity. And once the 30 year mortgage is paid off, you get tax-deferred or tax-free appreciation at 7%, PLUS still pay NO RENT, until you die.
My colleague in Fresno recently sold his 1400 sq ft home. He has two kids and wanted to buy something bigger.
He paid about 95K in 1994 and sold for 279K in 2005. I put the numbers in the IRR calculator and he earned about 9.3% a year for those 10-11 years. Not bad. PLUS did not pay rent. So his actual gain was more than 9%.
He originally had an 8% mortgage, but about 5 years into it refinanced. And then refinanced again as rates fell more.
And Fresno's appreciation historically has not been nearly as good as say SFO or LA.
It would be interesting to hear some numbers for people in NYC, LA, and SFO over the long-term say 20-30 years.
And I am not even considering the fact that most people only put out a small down payment of say 20% to 0% down these days.
Which gives you a great return on investment, due to the leverage.
You may only put down say 10,000 to buy a 200K house. So if you make a 10% return or more on the 200K house, your 10,000 investment is giving you say a 20K per year return, or nearly 50% return on the money actually invested. (Though you do have to make the monthly mortgage payments, which reduces your return relative to money invested. )
It was worth about 700,000 in 2003.
Home price appreciation over time in NE is probably a lower rate of return than other states, such as CA and NYC. So it would be interesting to get long term data for other houses in NYC and CA.
Anyway, putting those numbers into various calculators.
Inflation
1958 31,500 home would be worth $210,406.92 if it just kept pace with inflation. So home clearly rose above inflation rate, as calculated by CPI.
http://data.bls.gov/cgi-bin/cpicalc.pl
IRR Internal Rate of Return or Average Annual Yield calculator gives about 7% annual return.
http://cgi.money.cnn.com/tools/returnrate/returnrate.jsp
But you also have to remember, he paid no rent for the 47 years. So he is actually ahead quite a bit and has "earned" more than 7% annually on the home.
Assuming he originally had say a 6% mortgage and 30 year fixed loan, then he was ahead early on, even after considering the cost of borrowing money.
The money cost him 6% a year. But the home was appreciating at a tax-deferred 7%. (Possibly tax free depending on sale or transfer on death rules). In addition, his cost of borrowing was not 6%, but say 4%, because of tax deductions. So even after borrowing costs, he was ahead about 3% a year, not including rental savings.
So one way to look at owning real estate over the long term is this. You pay no rent for the entire time you are in the home, this could be as much as say $1200 or more a month, depending on the size of the home and the going rental rate in your town.
PLUS. At the end of 30 years, you own the home outright, and the home has probably appreciated in value at a rate that is so high that you beat inflation AND beat the cost of borrowing.
So you pay no rent. And you get back all of the money you paid toward the mortgage, plus interest!!!!
In the short run, you are cash poor. But it is like a forced savings. All the money that you paid in, you should get back eventually in home equity. And once the 30 year mortgage is paid off, you get tax-deferred or tax-free appreciation at 7%, PLUS still pay NO RENT, until you die.
My colleague in Fresno recently sold his 1400 sq ft home. He has two kids and wanted to buy something bigger.
He paid about 95K in 1994 and sold for 279K in 2005. I put the numbers in the IRR calculator and he earned about 9.3% a year for those 10-11 years. Not bad. PLUS did not pay rent. So his actual gain was more than 9%.
He originally had an 8% mortgage, but about 5 years into it refinanced. And then refinanced again as rates fell more.
And Fresno's appreciation historically has not been nearly as good as say SFO or LA.
It would be interesting to hear some numbers for people in NYC, LA, and SFO over the long-term say 20-30 years.
And I am not even considering the fact that most people only put out a small down payment of say 20% to 0% down these days.
Which gives you a great return on investment, due to the leverage.
You may only put down say 10,000 to buy a 200K house. So if you make a 10% return or more on the 200K house, your 10,000 investment is giving you say a 20K per year return, or nearly 50% return on the money actually invested. (Though you do have to make the monthly mortgage payments, which reduces your return relative to money invested. )