What’s the True Holding Cost?
When buying and selling a home, its common for us to look at the Purchase price versus the sale price, then say we made xyz on our home… but have you really?
In this weeks Blog, I wanted to go into the True Cost of your home… and cover off what almost all owners don’t take into consideration when working this “profit” out.
I think that over time great marketers, probably in the real estate industry, have embedded this theory that sale price minus purchase price = profit. Wrong.
Well what about Stamp Duty, Legal’s on the purchase and sale, repairs and renovations, real estate fees, mortgage insurance (if applicable), council rates, building insurance and the most important and always forgotten one, interest?
These interest costs are almost never calculated into our profits because they would simply make the “real” profit miniscule or non-existent. Yet in a Profit and Loss statement for a business they are included…
Now lets put this into a real life scenario and watch how scary the results are:
A couple purchase their home in NSW for $700,000 and they have a 10% deposit plus set up costs for the transaction. So to buy their home they require $70,000 deposit and around $30,000 in stamp duty and legals. The mortgage insurance can be added to the loan, which is approximately $16,000.
So their loan is $646,000 and lets use today’s interest rates of 6%.
They own the home for a typical time frame of 7 years before they sell again for $900,000. That’s a tidy $200,000 gain in capital growth but far less in actual profit.
For the sake of the exercise, the interest rate doesn’t change whilst they own the property and I have used rounded up numbers for some fees. In 7 years they would have reduced their loan down to approximately $580,000 by just making minimum monthly repayments
In everybody’s eyes they have made a neat $200,000 profit and for those a little more in the know they made:
$700,000 Purchase Price
$ 27,000 Stamp Duty
$ 19,800 Real Estate Sale Fees @ 2.2%
$ 3,000 Legals in and out
$900,000 Sale Price
$150,200 Profit
Now to look at the real profit they made we need to include:
$ 16,000 Mortgage Insurance that was added to the loan
$ 14,000 Council and water rates at $2,000 per annum
$ 7,000 Home insurance on the property @ $1000 per annum
$ 7,000 Repairs at $1,000 per annum, this is very conservative
$225,000 Interest on the mortgage (assuming they have paid down principal over the 7 years)
($118,800) Loss
Yes that’s right… in this scenario, this couple lost $118,800
Now I know there are millions of variations here, but this is to simply give some insight to what you should be calculating when working out your true profit.
To look at this in a different way, when purchasing this home, the capital appreciation needs to be $903 per week to break even after the 7 years. Would the property rent for $903 per week? Probably not…
To help minimise this, market timing is crucial. Even though this is your home and is a love purchase, that does not mean that you should not approach this purchase in the same way as you would purchase an investment property or buy shares. Buy in the low and sell in the high to maximise profits.
Other options are renting where you want to live and investing in multiple investment properties and the other obvious solutions to help maximise profit is to pay your home loan down faster. This can be done by:
• Make repayments to the loan as often as you are paid
• Make extra loan repayments
• Fix part of your loan at a low fixed rate
• Utilise the benefits of an Offset Account
• Purchase an investment property – hold for 5 years, sell and put lump sum profits onto home loan
Remember, the faster you can reduce your home loan, the faster you can start to build an investment property portfolio.