| Three obvious ROI friction factors you missed: 1. Closing costs. The mortgage is not a free transaction, for the buyer. There are a lot of services (inspection, title insurance) and misc charges. That's a couple thousand dollars. I don't know what the rule of thumb is; I know that it ended up being about $11k for a mortgage less than $300k, and that's without points or any other mortgage instrument issues. 2. Equity. Almost all of your payments in year 1 go to interest with 10% as the downpayment, you'd probably owe about $266.7k -- play with an amortization calculator. If you sold the house for $312k, the difference would be about $45k. That's $45k back for your $55k... except 3. Selling fees. The seller in a transaction is typically responsible for paying the real estate agent fees for some combination of seller and buyer. That's 3% each (if you both used something like redfin.com, it would still be 4% total). That's up to 6% of the $312k -- $18.7k. So, with #1 you increase your investment requirements (call it $10k, so $65k for the year). With #2 you decrease your net ($45 on the $65k). With #3 you decrease your net even more ($26 on the $65k). On the plus side, you typically only make 11 payments in the first year, so you're only out $37k instead of $39k! Summary: Real Estate transactions are not efficient, low-friction or highly liquid investments. Duh. This has a positive and negative aspect - you have the potential for outsized appreciation because of the illiquidity, and because transaction costs keep the potential market (somewhat) more constrained. But you also have greater penalties on shorter ownership cycles. Conclusion: One year is an awful timespan for a house purchase unless you're completely confident in an extreme appreciation or you are investing additional sums or sweat equity which may guarantee the extreme appreciation (ie, a flip). It has to be extreme. |