1
Suppose I purchase a home for $1 million, with a 20% down payment and a 30-year mortgage term.
Interest rate = 5%
+
Property tax = 1%
+
Maintenance = 1%
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= Total annual ownership costs of 7%
Average annual home appreciation in America is 5%
-
Annual inflation rate is 3%
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= Net annual gain of 2%
Problem #1: Tax & Maintenance
Over 30 years, one would end up be paying over $1 million just in interest and taxes, not including other expenses like maintenance & insurance.
Even if the house is fully paid off, the 1% property tax plus 1% maintenance offset the 2% annual gain, resulting in a nearly break-even scenario. Given the current inflation rate (roughly 7%), owning real estate may not be profitable.
Problem #2: Capital Gain Tax & Costs to Sell
Also, remember there are capital gains taxes for profits over $500,000 upon selling the house, and closing costs typically amount to 5%-6%.
Problem #3: Inflation
After 30 years, the property value would appreciate to about $4.3 million. Looking good? Not so fast! By taking inflation into account, that $4.3 million is roughly just $1.9 million of 30 years ago, so the net profit is -$100,000.
Conclusion
Adding the costs of maintenance approximately 1-2% annually over 30 years, the total expenses would likely reach around $400,000. This brings the overall profit to -$500,000 after three decades of homeownership. Not a favorable outcome.
In my opinion, tax benefits are minimal (with a maximum annual deductible of $10,000), and the capital gains tax on $2.8 million would be roughly $850,000 (including federal and state taxes), resulting in a total profit of -$1,350,000.
Nonetheless, why would anyone choose to invest in something that could potentially incur losses of up to $1.3 million over 30 years?