Need Help w/ Math... " )

[Tommy_Dolitte]

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?

 

[Brat]

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.

 

[Tommy_Dolitte]

Thanks. I understand that completely. I just need help w/ the math. My statements are only conditional.

 

[milz50]

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

 

[sgeeeee]

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.

 

[Tommy_Dolitte]

Thanks for responding guys. Reviewing now....

TD

 

[TromboneAl]

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?"