Opportunity Costs
 efore you start dreaming of becoming a real estate mogul, you should think about whether your money could be better invested elsewhere.
How much is being invested?
Given that it usually costs more to buy than to rent, when assessing the investment, you should look at what you could do with the additional cash if you kept renting.
This includes both your down payment and the money required for closing costs, as well as any difference in the monthly cost of housing expense.
For example: $100,000 house
So, if you bought a house for $100,000, made a $20,000 down payment and spent another $2,000 on closing costs, your opportunity cost is $22,000.
|
|
|
|
| $20,000 |
down payment |
| + |
2,000 |
closing |
 |
| $22,000 |
opportunity cost |
|
If it costs you $600 month to rent, and that you have to pay $750 a month in mortgage payments, etc. as a home owner, there is another $150 a month that you could invest.
|
|
|
|
| $750 |
mortgage |
| - |
600 |
rent |
|
| $150 |
|
|
Over 5 years, that would be $9,000 saved and invested elsewhere (assuming you didn't spend it on cool toys, or vacations, or both.)
|
|
|
|
| $150 |
|
| x |
5 |
years |
|
| $9,000 |
money saved |
| + |
22,000 |
opportunity cost |
|
| $31,000 |
available |
|
Alternative investments
The key question is how much could you earn in this elsewhere we keep mentioning?
Investment vehicles abound, there are lots of people who want money and will promise you an attractive rate of return for borrowing it. ROI (Return on Investment) is generally closely tied to risk.
Residential real estate is considered a solid, not spectacular, performer in most markets. Mostly because the supply can often respond quickly to increases in demand, and the main risk of oversupply happens only on a local economic level and is usually temporary.
You need to figure out where you fall on the risk curve and then look at the return on investments at that risk level. Click here for more details.
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