Expert: Sue Bernstein - 5/17/2004

Question
HELLO,
 I HAVE A VERY BASIC QUESTION.  EVERYONE WILL SAY HOW REAL ESTATE IS SUCH A GREAT INVESTMENT, TAX WRITE OFFS, ETC.  I JUST BOUGHT A CONDO IN A NICE NEIGBORHOOD (MY FIRST HOME, WOOHOO!!) FOR WHAT SEEMS LIKE A STAGGERING PRICE OF 237K FOR 880SQ FT.  AFTER 30 YEARS INTEREST AT 5.5% IM GOING TO END UP PAYING (I STILL CANT BELEIVE IT) HALF A MILLION DOLLARS.  OK, SO LETS SAY REAL ESTATE PRICES RISES, BUT I DONT THINK MY CONDO IS GOING TO APPRECIATE THAT MUCH (TO HALF A MIL) WITHIN MY LIFETIME.  SO LETS SAY 10 YEARS DOWN THE ROAD I SELL IT FOR 300K AND MAKE A SO-CALLED "PROFIT" OF 70K.  YET ALL THIS TIME (10 YEARS IN MY EXAMPLE), IVE BEEN ***PAYING OFF INTEREST***.  I HAVE IN EFFECT BEEN RENTING HAVE I NOT?  WITH THE INTEREST, I SEE NO PROFIT, FROM MY STANDPOINT.

WHAT AM I MISSING, OR IS THIS THE FACTS?  I AM NOT VERY KNOWLEDGABLE IN REAL ESTATE.

TIM

Answer
Dear Tim,

An accountant is the best person to answer tax related questions.  With that said, consider the following:

1. You need a place to live...pay a mortgage payment with tax advantages and earn equity or pay someone else's mortgage (landlord) and have no tax advantages.
2.  Your interest payments are tax deductible.  This amounts to approximately 90% of your payments for the first 5 years.
3.  Having been in this business for a long time I can tell you that there is no way to know what kind of appreciation you will experience in 5 years.

So, taking your example, your true monthly payment is much less taking into account your tax deductions and that $70,000 profit is not really set off by the interest payments since your are writing those payments off on your taxes.

I hope this helps and good luck in your new home.

Sue Bernstein
www.SueBernstein.com