Numbers people needed! please verify my math

[Pootie22]

Ok so I have been debating on whether I should sell the house i currently live in and go rent somewhere else or stay here. (Renting it out is not an option I want to look into for now).

I bought the house in 2011 at a rock bottom price so it has appreciated quite a bit. I live in Long Beach, CA and in a nice residential neighborhood but I'm 26 with no kids and would maybe want to move closer to the "fun" areas closer to the beach which is why I want to move, but at the same time I like having my garage and huge backyard (which i can't get in downtown) so there are good reasons to stay or to move, so for now i want to focus purely on the financial aspects, I will use a 12 month horizon for some assumptions. Here are the numbers!

House is worth about $350,000 (zillow says $399,000 but i want to be conservative)
I currently owe  $187,235 at 5.25% interest
If i sold the house today I would make $141,764 profit after 6% commission is paid out
I bought the house with my brother so he currently owns 30% "stake" so i would only keep 70% so about $99,235
If i invest $99,235 at a 7% return, in 12 months i would end up with $106,408
So this is the outcome in 12 months if i sell now

Now if i stay
Assuming the house appreciates 4%, it will be valued at $364,000 in 12 months (zillow says it will appreciate 8%)
with my current mortgage payment the same, in 12 months I will owe $183,720
If i sold the house then, i would profit $158,439 after 6% sales commission
So my share would be 70% of that, so $110,907

BUT since my currently mortgage "share" is about $950 a month (850 mortgage and ~100 maintenance, repair etc) and the rentals I would be looking at are in the $1,300 range I'm actually spending less money per month in my current house than if I rented. So I would be saving (and investing) $350 a month that I would otherwise not have if i rented.
This extra money to invest would be valued at $4,337 in 12 months.

So if I stay and sell in 12 months I would end up with $110,907 from the sale and $4,337 from the extra cash invested for a total of $115,244
Compared to selling now and renting a place for $1200 a month, I would end up with $106,408 in 12 months.

So I am better off by $8,836 by staying put for 12 months, is this correct?

Initially I though moving was obvious because i have so much equity tied in the house that could be earning me money in the stock market if i sold, but now after this calculation the tables have turned.

I know some of the assumptions in investment returns, appreciation etc can and will change. I have a spreadsheet where i can play around with all of those variables so more than anything i want to know if i am missing something in my calculation, some expense or thing i might have overlooked. This is kind of a big decision and as i played around with the numbers, there was some pretty big swings in both directions so i want to make sure I'm calculating this correctly. Any help is appreciated, I attached the spreadsheet as well in case anyone wants to take a look or play around with the numbers.

[frugalnacho]

zillow is terrible, at least for my area.  Not uncommon to see prices off by over 100%.  I would seriously reconsider using zillow as a source.

[boarder42]

you never say why you have to leave in a year ... makes way more sense to stay put for a long time financially unless you will get savings from somewhere else.  meaning communte time decrease or eliminated etc.  or you find an apt. that is cheaper than you current expenses on your home... so whatever is left after you factor out principal - rent needs to be cheaper than that to make it financially responsible.  unless like i stated before there will be other savings.

so i would use Mortgage - principal + Maintenance >/< rent - expense saving in new area.  whichever is cheaper is smarter financially.

[boarder42]

with an apartment that costs 50% more than your current mortgage payment(including the principal)  you will likely never come out ahead renting b/c thats a lot of expense to reduce.  so you're paying down your house at about 205 per month ... so the house is costing you 745 a month ... and you're looking at an apartment that costs 1300.  So you would need to decrease your expenses by 555 dollars a month to make this a "smart" Financial decision.  And that number will increase each year.  b/c you will be paying more toward principal and even less in interest.  So this will likely never be a smart move financially.. you need to evaluate this from a want level it sounds like.  and is it worth 7k a year to live closer to the beach?

[Pootie22]

zillow is terrible, at least for my area.  Not uncommon to see prices off by over 100%.  I would seriously reconsider using zillow as a source.

Zillow is not too terrible in my area, but anyway that's why i used $350,000 i am VERY sure i can get that right now (house down the street sold for $500,000 with only an extra bedroom and bathroom.

you never say why you have to leave in a year ... makes way more sense to stay put for a long time financially unless you will get savings from somewhere else.

I don't HAVE to leave, i just needed a specific time horizon for the calculation, it definitely varies and works out better if i stay MUCH longer. But that won't happen because my brother currently lives with me and i would eventually want to marry my girlfriend and live on our own.

[Pootie22]

with an apartment that costs 50% more than your current mortgage payment(including the principal)  you will likely never come out ahead renting b/c thats a lot of expense to reduce.  so you're paying down your house at about 205 per month ... so the house is costing you 745 a month ... and you're looking at an apartment that costs 1300.  So you would need to decrease your expenses by 555 dollars a month to make this a "smart" Financial decision.  And that number will increase each year.  b/c you will be paying more toward principal and even less in interest.  So this will likely never be a smart move financially.. you need to evaluate this from a want level it sounds like.  and is it worth 7k a year to live closer to the beach?

Well the initial reason why i thought i would work is because of the equity tied up that can be invested to earn more money (since the stock market will likely have better returns than home appreciation), so i don't have to decrease my expense by 555 dollars, if i can increase my income by more than $555 (by investing the profit from the sale now) then i would come out ahead.
For example, with last years 30%+ returns it would have made sense to sell and invest the profits because those profits would earn much more money than the extra money it was costing me to rent. But with smaller returns that decision isn't as obvious.
Purely looking at how much i spend a month doesn't tell me whether i would be better off in the future or not, I also wanted to look at the increase in investments.

[Cheddar Stacker]

so i would use Mortgage - principal + Maintenance >/< rent - expense saving in new area.  whichever is cheaper is smarter financially.

+1.

Your "expense" for the mortgage is everything you pay except the principal. Compare that to rent. Pick the winner. Stay as long as possible. If you move to a lower cost of living area eventually the rent might be cheaper.

The only other math factor would be the potential value of the house in the future, but that's unpredictable. In other words, if you know somehow the house will be worth $300K 2 years from now, or $450K 2 years from now, that could factor into your decision but it's just speculation.

A few other random thoughts/questions/observations:

-It appears you aren't paying exactly 70% of the monthly costs, it seems like you're paying 75% or more. Maybe your brother put more money in up front?
-Since your brother lives with you, and wouldn't live with you after marriage maybe you could consider buying out his 30% share since it's a lower cost situation if you stay?
-The math seems solid, and by staying you have 2 things going for you: 1)It's a cheaper monthly expense and 2) The fixed interest leverage is effectively doubling the 4% appreciation each year, so that beats the 7% market return you're projecting.
-If you stay, look into a refinance. 5.25% is high for today's standards. And hurry, because I've heard a lot of discussion about the fed increasing rates by the end of the year if not sooner.

[superone!]

As a fellow Long Beachian (who lives 3 blocks from the Ocean), I can attest that there is something really great about being close to the beach. And there are other benefits down by the beach too-- for example, unless I leave Long beach I never need to use my car. The entirety of downtown is easily walk/bikeable.

I agree that you should weigh expense of the mortgage against the rent (not the total mortgage payment), but I think you can do better than $1300 living near the beach. What kind of a mansion are you trying to move into down here? Are you planning to live alone or with your girlfriend/roommate/brother? My partner and I share a (ridiculously extravagant to my eyes) 2 bedroom for $1580. That's $790/month each. We have a driveway and a garage (though sadly, no yard). If you shop around there are some very nice places for well under $1300/month, as long as you are willing to live with someone.  (Even when I was looking to live on my own, before my partner decided she was going to move with me, I was looking in the $1000 range).

[warfreak2]

I presume the amount owed on the mortgage is the total, not your 70% share? Assuming it's the full amount, you have 21 years ~5 months until it's paid, is that correct? (Actually it won't affect the calculation that much.)

These questions are easiest to answer using present values - your method (value in 12 months) is more complicated. Let's assume the stock market returns 10%/7% before/after inflation.

If you stay put and pay off the mortgage, you owe $850/month or $10,200/year, fixed, for ~21.4 years, plus $100/month or $1200/year rising with inflation. The present value of your housing needs is approximately -$850*(1 - 1/(1.10)^21.4)/0.10 + -$1200/0.07 = -$24,540.

If you sell and rent, you get $99,235 and your rent is $1200/month or $14,400/year indefinitely, rising with inflation. In this scenario the present value of your housing needs is approximately $99,235 - $14,400/7% = -$106,480.

I.e. you're the equivalent of $81,940 better off today, or an inflation-adjusted $5736 every year, by staying put. The main reason staying put is better, is that 7% of your cash-out is nowhere near enough to pay the rent. The figure is a bit different from yours because I compared staying put forever, rather than selling at a bigger profit next year.

Feel free to substitute in different values to see the effect of different rents, different stock market returns, &c.

i would use Mortgage - principal + Maintenance >/< rent - expense saving in new area.  whichever is cheaper is smarter financially.

This is a good rule of thumb but not quite correct as the mortgage interest payments go down (and eventually reach zero) over time, while rent goes up.

[Pootie22]

so i would use Mortgage - principal + Maintenance >/< rent - expense saving in new area.  whichever is cheaper is smarter financially.

+1.
Your "expense" for the mortgage is everything you pay except the principal. Compare that to rent. Pick the winner. Stay as long as possible. If you move to a lower cost of living area eventually the rent might be cheaper.

I understand the monthly expense will be higher if i leave, but aren't i also earning more money from the money invested from the sale? So both should be taken into consideration not just the monthly expense.

Again, if the market was returning 30% like last year, my expense would still be lower if i stayed and not rented, but i would miss out on those 30% returns because my money is tied up in the house.

[frugaliknowit]

There are too many moving parts and unknowns to say.  Yes, if the stock market takes off, real estate prices do not do well, and rents drop (????) you might be better off selling the house and renting.  Using Zillow for your equations is not a good idea (if you are serious, use a realtor you trust or an appraiser).

The likelihood is rents will rise over time.  Take your $1200 scenario with a 3% annual increase and in ten years you are at, voila:  $1612.70.  Seems like you need to chill and enjoy your home!

[Pootie22]

There are too many moving parts and unknowns to say.  Yes, if the stock market takes off, real estate prices do not do well, and rents drop (????) you might be better off selling the house and renting.  Using Zillow for your equations is not a good idea (if you are serious, use a realtor you trust or an appraiser).

The likelihood is rents will rise over time.  Take your $1200 scenario with a 3% annual increase and in ten years you are at, voila:  $1612.70.  Seems like you need to chill and enjoy your home!

yes there are a TON of moving parts lol which is why i wanted to make sure i put those moving parts in the right place. I know that the assumptions can change. But mainly i wanted to check my math, am i calculating this correctly? Am i forgetting anything? It's all on a spreadsheet so once i know my math is correct i can try to fine tune these assumptions like market return, real estate prices etc.

There are certainly other variables that i will add in later, like benefits of biking to more places if i moved.

Just wondering if I'm miscalculating something, maybe taxes on the capital gains vs taxes on the sale of property etc.

[Cheddar Stacker]

so i would use Mortgage - principal + Maintenance >/< rent - expense saving in new area.  whichever is cheaper is smarter financially.

+1.
Your "expense" for the mortgage is everything you pay except the principal. Compare that to rent. Pick the winner. Stay as long as possible. If you move to a lower cost of living area eventually the rent might be cheaper.

I understand the monthly expense will be higher if i leave, but aren't i also earning more money from the money invested from the sale? So both should be taken into consideration not just the monthly expense.

Again, if the market was returning 30% like last year, my expense would still be lower if i stayed and not rented, but i would miss out on those 30% returns because my money is tied up in the house.

Trying to attain a 30% return like last year is speculation/chasing returns. Don't count on that, use averages. And you are also earning more money from the appreciation of the house (4% on a leveraged asset, so really more like 8% on your equity, which beats your 7% stock return).

In addition, don't listen to me or anyone else now that warfreak2 has posted. Go back and read his post, and ask him questions. He's a mathematician by trade, and I wouldn't question anything he advises for calculating the comparative returns of these two scenarios. He's razor sharp when it comes to this. I need to be sharpened a bit.

[boarder42]

to me it sounds like you're trying to financially justify living nearer the beach.  and with your current rent numbers this is never going to be possible. 

1. find much lower rent
2. find roommates
3. just stay put and Refi.

[warfreak2]

In addition, don't listen to me or anyone else now that warfreak2 has posted.

This is kind but hardly fair! My post has a bunch of assumptions that people can usefully challenge or change, and it doesn't include house price appreciation (though I think it may be a red herring). Also, it's not like I never make mistakes.

[Pootie22]

Well I'm certainly not trying to "justify" moving closer to the beach, IF my calculations are correct with THESE particular assumptions (whether the assumptions or correct or not doesn't matter to me right now) then the answer is simple. I'm better off staying put (assuming that my math is correct).
I wasn't really trying to get help deciding whether i should move or not, mainly because there are A LOT of other variables that will go into that decision that i did not share in this post.

Just simply wondering if the math is correct or if there is anything else I'm not factoring into the math.

[Cheddar Stacker]

In addition, don't listen to me or anyone else now that warfreak2 has posted.

This is kind but hardly fair! My post has a bunch of assumptions that people can usefully challenge or change, and it doesn't include house price appreciation (though I think it may be a red herring). Also, it's not like I never make mistakes.

True, we all are subject to mistakes or invalid assumptions. My point was that anyone listening to my math skills over yours would be akin to listening to my frugality/badassity skills over MMM's. You sir, got skillz. Much respect my friend.

And the OP has only a handful of posts, so I have to assume he's relatively new to the forum and I wanted to make sure he knew who he was dealing with.

[Emg03063]

Is your brother carrying a separate mortgage on his share of the house, did he buy his share for cash, or does he pay a fraction of the total mortgage?  Have you discussed the idea of selling with him?

[hexdexorex]

The return from the market/house are assumptions...so I wouldnt put much faith in them.

I would just stay with the house....you have a super low rate that wont rise ...while rents may rise..plus its a tax right off...just pay it off slowly and put all your extra money in the stock market..

Also capital gains from the sell of the house...