Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Need Help w/ Math... " )
Old 10-27-2005, 10:52 AM   #1
Recycles dryer sheets
 
Join Date: Jul 2004
Posts: 170
Need Help w/ Math... " )

Good morning.

I'm trying to determine how one would go about figuring out which option is better...

1.* Take NET INCOME and purchase the MOST EXPENSIVE home one can realistically afford, hoping that appreciation is favorable.

2.* Determine the MINIMUM INCREMENTAL AMOUNT of dollars you would have to save on top of your existing investments that would offer the same NET RETURN.

So...*bare with me here...** *

Investments * return = Option 1
Home * return = Option 2

How do I compare the incremental investment required in Option 1 to be >/= the net gain realized from B?

__________________

__________________
Tommy_Dolitte is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Re: Need Help w/ Math... " )
Old 10-27-2005, 11:00 AM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Brat's Avatar
 
Join Date: Feb 2004
Location: Portland, Oregon
Posts: 5,913
Re: Need Help w/ Math... " )

My concern isn't the math, but the assumption that the most expensive house you can aford will increase in value. The house most likely to increase in value is the least (or almost the least) expensive sound house in a good neighborhood. Improve it in ways that will make a difference when you sell. That is a home where you have a potential of beating the market.
__________________

__________________
Duck bjorn.
Brat is online now   Reply With Quote
Re: Need Help w/ Math... " )
Old 10-27-2005, 11:07 AM   #3
Recycles dryer sheets
 
Join Date: Jul 2004
Posts: 170
Re: Need Help w/ Math... " )

Thanks. I understand that completely. I just need help w/ the math. My statements are only conditional.
__________________
Tommy_Dolitte is offline   Reply With Quote
Re: Need Help w/ Math... " )
Old 10-29-2005, 05:46 PM   #4
Confused about dryer sheets
 
Join Date: Feb 2005
Posts: 2
Re: Need Help w/ Math... " )

Tommy -

Here are my quick thoughts.* I think this is correct...

From my understaning, I think you want to determine the amount of a periodic investment that would equal the gain on your hypothetical house.

As you mentioned, the gain on your house would be:

Home * Total Return = Gain

To determine the incremental periodic investment that would equal the Gain, you will need to assume the number of periodic investments and a constant rate of return per period.

Assume you were to hold the home for 5 years.* The opportunity cost would be making 60 periodic investments (N).* Assume that these investments returned 8% annually.* Each period would have a rate of return of .08/12, or .0067 (i).

The formula would be:

Gain (from house) = Monthly Investment * [ (((1 + i) ^ N) - 1) / N ]

Gain (from house) = Monthly Investment * [ (((1 + .0067) ^ 60) - 1) / 60 ]

Gain (from house) = Monthly Investment * 73.55

73.55 = Gain (from house) / Monthly Investment

So, a $50,000 home gain in 5 years would require about a $680 monthly investment.

Obviously, this doesn't take into account taxes and such.


Hope this helps...

Matt
__________________
milz50 is offline   Reply With Quote
Re: Need Help w/ Math... " )
Old 10-30-2005, 01:41 AM   #5
Thinks s/he gets paid by the post
 
Join Date: Feb 2003
Location: Mesa
Posts: 3,588
Re: Need Help w/ Math... " )

Tommy,

This is not a calculation that is appropriately dealt with by deterministic equations. It is clearly a probabilistic concept. You can use FIRECalc to caclulate the probabilities of coming out ahead with one approach over the other. FIRECalc allows you to run simulations that include temporary expenses (mortgage payments) and one time income/expense events (house sales/house purchase), etc. You can run various simulations that examine your overall portfolio under the assumed conditions. But you still have to assume something about the appreciation of the real estate. Good luck with that.

__________________
sgeeeee is offline   Reply With Quote
Re: Need Help w/ Math... " )
Old 10-30-2005, 11:50 AM   #6
Recycles dryer sheets
 
Join Date: Jul 2004
Posts: 170
Re: Need Help w/ Math... " )

Thanks for responding guys. Reviewing now....

TD
__________________
Tommy_Dolitte is offline   Reply With Quote
Re: Need Help w/ Math... " )
Old 10-30-2005, 03:59 PM   #7
 
Posts: n/a
Re: Need Help w/ Math... " )

TD,

You might want to restate your question. I've read it several times, and am still not clear on what you are asking. Taken literally your question is:

"Should I buy a big house or perform a calculation?"

Then, you paraphrase it in the reverse order(?). Finally, I think you say "incremental" when you mean "initial."

I think that you are asking

"How can I compare the outcome of buying a big house, or investing the money instead?"
__________________
  Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
The Toilet and The Seat - Let's Do The Math Danny Other topics 26 06-06-2008 04:34 PM
Anyone ever do the math on the economy of an RV vs. a motel? Cut-Throat Life after FIRE 109 03-26-2007 02:35 PM
Math teacher arrested farmerEd Other topics 8 03-04-2006 03:06 PM
Financial Math Wizards Required nwsteve FIRE and Money 7 02-20-2005 03:53 PM
Weapons of Math Instruction BigMoneyJim Other topics 2 03-25-2004 07:03 AM

 

 
All times are GMT -6. The time now is 04:54 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.