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Earlier today, Justin asked for feedback about whether he should buy a condo or continue to save for his retirement. GRS reader Andrew forwarded a tool that may help Justin make his decision.
HouseMath 2.0 is a web-based app designed to help users explore the costs of purchasing a new home. You enter the numbers for the proposed transaction, and HouseMath runs the numbers to let you know the financial implications. Rather than bombard the user with a bunch of numbers, though, the program provides an easy-to-understand narrative summary
Currently, HouseMath features built-in information for a handful of major markets. According to its creator, additional markets will be added in the future. (You can help him by providing information about your local housing market.) Because Portland isn’t one of the markets listed, I chose to play with numbers using HouseMath’s Seattle-based info. I entered the details for the mortgage we took out 3-1/2 years ago, and HouseMath provided the following analysis:
HouseMath offers further analysis of closing costs, first month costs, and selling costs. It also provides a couple of charts, as well as details on the long-range financial effects of buying a house.
This is an interesting little app. There’s a lot of potential here. It seems a little light at the moment, but with proper polishing, this could be a useful tool for many people.
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October 26th, 2007 at 1:31 pm
Of course, if you don’t save the difference, you’ll be paying rent forever.
October 26th, 2007 at 1:46 pm
That looks pretty cool. Bookmarked for later. Thanks!
October 26th, 2007 at 2:13 pm
Cool concept - I ran the numbers for the place we’ve owned for 5 years. It argues that I’d be better off if I’d invested the down payment, monthly mortgage payments, and property taxes while renting a place for $633 a month.
(Interestingly enough, I helped a friend look for apartments in that range here in Redmond a few years ago. If you’re happy with 500 sq ft or less and no washer/dryer in the unit, you might find one. Or you could live further away from jobs, spend more on gas, and another couple sq ft.)
I do wonder why it’s coming up with federal capital gains taxes for the sale. The estimated profit on sale after 10 years is $185,000, which is well under the $500,000 married-filing-jointly exclusion from the federal capital gains tax.
October 26th, 2007 at 2:17 pm
I wonder if the capital gains tax has a sunset clause? I ran the numbers for selling in 5 years (aka today) and at the assessed-for-taxes price ($100,000 profit) and it came up with $0 for the capital gains tax.
October 26th, 2007 at 3:16 pm
Shouldn’t this ask how much you make, to decide whether the tax savings are worth it?
Also, if it asked how much your rent is, it could do a nice little comparison.
Anybody seen a good spreadsheet with all this stuff in it?
October 26th, 2007 at 6:01 pm
Cool tool, but I’m not sure why I have to sell after 30 years. I’m not that old.
Also, the investment totals are a (bit) misleading, because you are paying tax as you go on a house, which lowers your investible value naturally.
However, they assume no taxes nor withdrawls of the investment, and no withdrawls while it growing is a fine assumption, but by not including taxes at the end, (which if you are comparing a house payment, it is above the Roth IRA max)it’s a bit unfair.
So my humble suggestion to balance it out:
Assuming tax is kinda difficult, but if they are going to force a home sale after 30 years, why not force the investment to be regularly exercised for the 30 years after the home sale, and figure the tax rate on that. So in year 31, you’d get ( current investment value / 30 ) * (effective tax rate) and so on for 30 years.
That’d be a more fair comparison.
But those are minor quibbles. Cool tool.
October 26th, 2007 at 6:51 pm
Interesting, but I’d like to to point out two things that may be major errors in the analysis you got: First, in the US, if you sell a home that is a primary residence for most of the past three years (I believe it’s 3/4 of the time or something like that) then you will not pay capital gains taxes - if you buy another house.
Also, in my experience buying three homes, only once did the seller pay closing costs. Most of the time it is the default that the buyer pays.
Perhaps I just misread it, since both of these things seem like common sense…
October 26th, 2007 at 7:36 pm
Tax laws change all the time. Maybe if you’re flipping in a short time frame, you can assume the no capital gains tax up to 250K/500K. Long term time frame? I suspect the no cap gains thing will just sunset without renewal in the future since this country is facing the impending baby boomer retirement doom.
October 27th, 2007 at 5:41 am
I just received a used copy of Skyscraper from Amazon. It is a book about building a condo building in the late Eighties. The apartments now sell for well over a thousand dollars per square foot. Am I weirdo because I like looking at floorplans the way some people like trainspotting but I don’t want to buy, I just like to LOOK. I’m a very visual person and there are some hilarious layouts in the Manhattan apartment market. I also like to watch House Hunters on HGTV to see what people end up buying but I have yet to want to own anything I have seen.
October 27th, 2007 at 8:48 am
Maybe I’m using the program incorrectly but I entered the information for the house my family bought in Chicago two years ago and it’s giving me numbers that are wildly off from what the actual numbers are.
E.g., it’s assuming my monthly payment as a full $1,000 more than it actually is. Plus, it suggesting a comparable rental unit for only $750 when, in actuality, something similar to our house in Chicago would be in the $2,000 per month range.
October 27th, 2007 at 9:53 am
[...] Get Rich Slowly: House Math 2.0, A Real Estate Analysis Tool [...]
October 27th, 2007 at 10:53 am
The previous comment 6 is absolutely NOT TRUE (old law since changed.)
—
Interesting, but I’d like to to point out two things that may be major errors in the analysis you got: First, in the US, if you sell a home that is a primary residence for most of the past three years (I believe it’s 3/4 of the time or something like that) then you will not pay capital gains taxes - if you buy another house.
—
The law has changed. IRS Publication 523 “Selling Your House” discusses the current laws:
http://www.irs.gov/publications/p523/index.html
You don’t “roll it over” anymore. This changed in the late 1990s, IIRC. There are residency requirements. There are now (large) limits on capital gain amounts that are excluded from taxation, such that most people pay no capital gains as long as they meet the residency requirements.
Anyone considering selling a house, or who anticipates a large gain if they did sell (250k single or 500k married) should become familiar with current law.
October 27th, 2007 at 11:04 am
Assuming 4.5% home price appreciation (above inflation?) is not supported by any historical trend beyond the last 10 years of speculative frenzy. Historically, homes have held their value with inflation. In the past, homes have shot up in value, then returned to that long term trend line soon after. Recently home appreciation has been far above the usual trend. Many self serving people anticipate a “higher plateau”. Other people looking at similar transients in the past say “look out below”.
Assuming such an anomalous rate for the next 30 years, especially through the near term turmoil, would be very dangerous.
October 27th, 2007 at 12:40 pm
I didn’t realize that in the US you pay a capital gains tax on the sale of your home. I knew that mortgage interest was tax deductible.
In Canada we don’t have tax deductible mortgage interest but there is not tax on capital gains from the sale of your principal residence.
Interesting differences!
October 27th, 2007 at 4:51 pm
“I believe it’s 3/4 of the time or something like that) then you will not pay capital gains taxes - if you buy another house.”
It is 3 out of the last 5 years before you sell, and it doesn’t matter if you buy another house or not. At least when I sold the condo I was renting this was the rule. I had to pay capital gains because my tenants lived 4.5 years out of last 5. It was OK because prices went up by a lot more the last year in a half I was renting. Had I known they’d continue to go up, I would’ve just moved back in for 1.5 years and rented out my main place…
I don’t view my primary residence as an investment, only as a place to live. I am even reluctant to include it into my net worth, even if it is paid. You have to live somewhere and living in your own place is a whole lot nicer than renting. In addition, as it was pointed out in 9. above, the numbers in the program cannot be right - there is no way you could rent a $282,000 property for $751 a month. Imagine you own this property - would you rent it out for $751? The rent one would charge has to cover your mortgage, taxes and repairs - you have to be in charity business to rent a 282,000 property for $751 a month. Even with rent - renting a house is more expensive than renting a studio, if you rent a studio you’ll save money. If you live in a car, you’ll save even more. So if you want to compare renting a one bedroom to buying, maybe you should compare renting one bedroom to buying a one bedroom condo or even a co-op since co-ops are closer to rentals in quality.
October 27th, 2007 at 7:44 pm
Kitty, you rent it for $751 if that’s what renters will pay. If other landlords are only charging $751 because they have less expenses than you (e.g. bought in the past) — that’s what you have to charge or otherwise your rental will just sit empty.
This has been the case in my area for the past 5+ years now. Rents have ranged from 1/2th to 1/3rd of total owning costs. Anybody who bought property to rent is bleeding money every month. I’m sure they all certainly want to increase the rents to cover their owning costs but simply can’t.
My mom experienced this firsthand. She wanted $850 for a small unit but the rental applicant offered $800. She said no and then the place sat empty for 9 months as comparable rents dropped even lower. It’s going to take her 12 years to break even on her stubbornness to get that extra $50 a month.
October 27th, 2007 at 10:01 pm
pretty interesting.
however, i wonder if its really accurate. It doesn’t consider closing costs, upgrades or maintenance.
plus people have a bad habit of refinancing every few years and wasting a ton of money on the refinancing.
October 29th, 2007 at 10:14 am
“Kitty, you rent it for $751 if that’s what renters will pay. ”
Yes, but when the price you can get drops to the point where you are loosing money, then you’ll just sell, even at a loss. Is your mother’s property worth $282,000? Is it the current price for small apartments in your area?
In my area one bedroom condos do sell for about 300K and one bedroom co-ops for around $160K. But in my area, the rents for one bedroom are in $1300-1800 range with properties more similar to co-ops renting for $1300 and condos renting for 1800 which is a lot more similar to what it would cost to buy a similar property.
October 30th, 2007 at 3:07 pm
Does anyone have a resource to see historical home appreciate rates by market? I know it’s going to vary by city but I’m not sure how 4.5% compares to historical averages. I’ve found a lot of Web sites that show home appreciate rates for the last 10 years, but I’d like to see the data from the 70’s, 80’s, and 90’s to get a better sense of the historical growth.