Buying real estate property doesn't make financial sense

[Rich Chen]

Just a simple math:

Let's say I buy a home for a million dollars, with 20% down and 30-year term

    interest rate = 5% 
    +
    property tax = 1%
    +
    maintenance = 1%
    -------------------------------------------------
    = Total 7% annual costs of owning a house 

Now, during the 30 years of owning the house

    Average homes in American appreciate 5% annually
    - 
    Inflation runs 3% annually
    ----------------------------------------------------------
    = 2% gain annually


Those are just rough numbers. In real life, of course interest rates and inflations are much higher. For the sake of this exercise, let's keep it simple. 

Also don't forgot there is tax on capital gain for over $500,000 when house is sold, andclosing costs typical goes around 5%-6%.

So unless home appreciates A LOT, it doesn't seem to make sense to own a property as long as you are paying mortgage with interest, unless one can pay it all back in much shorter term (10 years or less). The only upside I see is that family get to live in it for "free". 

Even the house is fully paid off, the 1% property tax + 1% maintenance offsets 2% annual gain. It only about makes even. At current rate of inflation (7% roughly), it loses money owning real estate properties.

In 30 years, one would be paying over 1 million dollars for just interest and tax, let alone other costs such as maintenance. 

Calculator link: https://www.mortgagecalculator.org/?q=cy8pc-1KW

Am I missing anything?

[JD Martin]

Quote from @Rich Chen:

Just a simple math:

Let's say I buy a home for a million dollars, with 20% down and 30-year term

    interest rate = 5% 
    +
    property tax = 1%
    +
    maintenance = 1%
    -------------------------------------------------
    = Total 7% annual costs of owning a house 

Now, during the 30 years of owning the house

    Average homes in American appreciate 5% annually
    - 
    Inflation runs 3% annually
    ----------------------------------------------------------
    = 2% gain annually


Those are just rough numbers. In real life, of course interest rates and inflations are much higher. For the sake of this exercise, let's keep it simple. 

Also don't forgot there is tax on capital gain for over $500,000 when house is sold, andclosing costs typical goes around 5%-6%.

So unless home appreciates A LOT, it doesn't seem to make sense to own a property as long as you are paying mortgage with interest, unless one can pay it all back in much shorter term (10 years or less). The only upside I see is that family get to live in it for "free". 

Even the house is fully paid off, the 1% property tax + 1% maintenance offsets 2% annual gain. It only about makes even. At current rate of inflation (7% roughly), it loses money owning real estate properties.

In 30 years, one would be paying over 1 million dollars for just interest and tax, let alone other costs such as maintenance. 

Calculator link: https://www.mortgagecalculator.org/?q=cy8pc-1KW

Am I missing anything?

 Yes, you are missing a lot unless your choice is between buying a home and living in a van by the river, in your parent's basement or under the overpass. 

You have to live somewhere. If you buy a house in 2024 on a 30 year note, you've essentially locked your "rent" payment in for 30 years. In 2054, when your note is set to expire, you will still be making payments based on 2024 dollars while all of your fellow renters will be paying rent in 2054 dollars. 

So forget about thinking of it as a "return"; instead, think of it as a hedge against expenditures. Whatever you make in terms of appreciation and tax benefits is just the icing on the cake. Just go to a calculator and compare it. If you make a couple of assumptions - i.e. rent in any given market is somewhere around 25%-30% cheaper than the cost of a monthly mortgage payment - you can find out pretty fast what's better for you. I just ran a quick one using your figures on NerdWallet, and by year 30 you've spent $1.9 million on rent and $2.0 million on the purchase, but the house (using your 5% appreciation figure) is now worth $4.3 million. That's a $2.3 million "profit". Even if we use a more modest 2% (inflation) appreciation model, you end up with $1.9 million, which is a $100k "loss" versus a $1.9 million loss.

Of course there's lots of other factors - can you stay there for 30 years? Will you totally remodel the house a dozen times? ETC - but bottom line, if you are stable geographically you will end up far, far ahead if you buy a house, and even more so if that house is reasonably priced & valued relative to rentals in that area.