A mathematic model for Real Estate
Author: boored
Category: Investors Insights
Interest rate (r)
Loan Duration (N)
Home price (P)
Down Payment (D)
Mortgage Amount (M)
Income Tax Bracket (rIT)
Property Tax Rate (rPT)
Maintenance (rM))
Insurance (rI)
Monthly Real Cost = ((r/(1-(1+r)^(-N))+ rPT)*(1-rIT)+ rM+ rI)*M/12
Other inputs:
Inflation Rate (IR)
Monthly Rent (MR)
Renting Increasing Rate (RI)
House Appreciate Rate (H)
Mortgage Fee (MF)
Attorney Fee (LF)
Agent Fee (AF)
Running the model and identify the most important factors are: House Appreciate Rate, Down Payment, and Interest Rate. Monthly rental income is not very important because it is correlated to interest rate.
Sensitivity Analysis (IRR):
|
|
|
Appreciation Rate
|
||||||
|
|
|
0% |
1% |
2% |
3.7% |
4% |
5% |
6% |
|
Interest Rate
|
5.50% |
0.7% |
4.7% |
8.0% |
12.6% |
13.3% |
15.6% |
17.7% |
|
5.75% |
0.4% |
4.5% |
7.9% |
12.5% |
13.2% |
15.5% |
17.6% |
|
|
6.00% |
0.1% |
4.3% |
7.7% |
12.4% |
13.1% |
15.4% |
17.5% |
|
|
6.25% |
-0.2% |
4.1% |
7.5% |
12.2% |
13.0% |
15.3% |
17.4% |
|
|
6.50% |
-0.5% |
3.9% |
7.3% |
12.1% |
12.9% |
15.2% |
17.3% |
|
|
6.75% |
-0.8% |
3.7% |
7.2% |
12.0% |
12.7% |
15.1% |
17.2% |
|
|
7.00% |
-1.0% |
3.5% |
7.0% |
11.9% |
12.6% |
15.0% |
17.2% |
|
|
7.25% |
-1.3% |
3.3% |
6.9% |
11.7% |
12.5% |
14.9% |
17.1% |
|
|
7.50% |
-1.6% |
3.1% |
6.7% |
11.6% |
12.4% |
14.8% |
17.0% |
|
|
7.75% |
-1.9% |
2.8% |
6.5% |
11.5% |
12.3% |
14.7% |
16.9% |
|
|
8.00% |
-2.2% |
2.6% |
6.4% |
11.4% |
12.2% |
14.6% |
16.8% |
|
|
8.25% |
-2.5% |
2.4% |
6.2% |
11.3% |
12.1% |
14.5% |
16.7% |
|
|
8.50% |
-2.8% |
2.2% |
6.1% |
11.2% |
12.0% |
14.4% |
16.6% |
|
Conclusion: With rental income, leverage, and long term house appreciation around 4-5%, real estate investment is a decent investment. It could be as good as stock investment. However, it might need more efforts, it could have more trouble, and it certainly could lose money.
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