Don't Ever Sell - Housing

 Caveat: I used to sort out mortgages for people, as a jog. Mortgage refinancer. I saw hundreds upon hundreds of applications. Interviewed people, talked to them about their finances, what they wanted, what they did. Now.. 20 years later, those thoughts have bubbled up, and I have some insights.

The Argument to not Sell.

Regardless of how the rich get richer, which I'm sure enough people have vlogged and blogged enough about, these are my thoughts on just logic and math and loans and life.

You: 1950s, have a job, a decent enough income to apply for a loan. You've gone through all the hoops, saved 20% and bought a house. Your Income is $3000 a year, and houses cost $9k (I'm averaging from across multiple sources, and rounding off for readable math). So since the advised payment was $1k a year (one third to one quarter of your income, but for simple math we'll go a third) you'd have paid it off in 15 years, dependant on you getting pay rises, interest rates, investing a little into your loan or not, and other small issues.

Lets say 15years. Its now the early 1970s, your income has climbed to $4000, and houses cost $16k. you're house is paid off, but it cost you $12k to buy it. consider.. don't compare the $16k you can sell it for, compare the $9k price tag (and the $225 stamp duty, and another $25 in bank fees)

You paid $12,250, for a $9k house. In 1970s terms, your $16k house cost you $21,700.  

You 'can' sell, you'll probably get $16k for your house, and be looking to upgrade to a $20k house, only needing a $4k loan. That may only take 5 years to pay off, but you might have paid stamp duty on the new house of $500, capital gains tax on the $16k for $2k, So, this new house is costing you $100 a year in interest, for a total 'upgrade cost' of $7k. BUT remember, you've "paid" $21700 to own this house, you're $5k equity in the hole, now with the new $7k, you're equity is $12k backwards.

How is it possible to ever make money on a house?

Well, its super tricky, and likely you never will, but if YOUR house is worth $21,700, while the rest of the market is $16k, THEN you could break even on the sale. Likely though, to do that, you'd need to not just maintain the property, but invest in it to make improvements, BUT since that costs money, and we all know, you'll never truely make back what you put in, you'll be push a rock uphill. 

Pity we can't convince the govt, that capital gains tax, doesn't take inflation into consideration. 

Lets say, your grandpa did this in the 1950s, and you're sitting in the 2010s, inherited the house, and are thinking about selling. 

That house in 2014 is now worth 300k, your income is $55k, so even after paying inheritance tax, capital gains tax, and income tax, you're looking at a take home of 2 years paycheck.. Thats worth it right? 

well no, a) because of all those taxes, b) because that's your heritage, c) you're giving up the family wealth, that could support your family for generations, just so you can make some dumb purchases? (lets be real, unless your an avid investor or businessman, in which case you probably already know this, you're not going to spend it wisely)

Most rentals go for 5% of the property price, so over 20years you'll earn back your houses worth, again. Better yet, take out a loan ON that house to buy a 2nd house, rent that out, now you can deduct the interest from the house, from the taxable income. Make repairs, even improve the house, comes out of the taxable income (and might increase rent). Use some of THAT money for your dumb purchase.

Long Term

Consider, Had your grandpa been informed of this knowledge, in 1970, he's have bought a 2nd house, instead of selling.  

Your parents, instead of paying rent to some other person, could rent out this first house, and help pay off the mortgage. This likely means grandpa could have bought a 3rd house, 10 years later, just before retirement. If you have a uncle or aunt, they could have rented that one.

By the 1990s, your family would own 3 houses, instead of paying $5k a year in rent, it'd have been invested in the family houses. now, not needing to even GET a mortgage, your dad and uncle, could both, use the equity in the houses to get an extra house each (though, in the 90s interest was so bad, maybe they would have held off) but lets say, split the difference, they bought 1 extra house, put both  their 1/4th incomes into it.. 7years and it'd be owned (even at 15% interest as it was)

by 2000, you are born, and you already own a house to move into when you're in your 20s. in the gap between then and now, your dad and uncle have bought two more houses, renovated the other four for wifi, cable, aircon, insulation, etc. and had enough left over for yearly holidays.

Your grandpa, likely passed on (god rest his soul, sorry for your loss) created a legacy for your family, you don't pay rent, but instead contribute 1/4th your income to the family (trust?) to build a healthy portfolio of property for your kids. your family owns 8 houses, lives in 4 of them and rents out 4 of them to also contribute to the trust.

This.. by the way, is what I referred to at the top, about how rich families exist. When grandpa passed, all houses, re-evaluated at worth, passed on to the family trust, pay no capital gains (because you don't sell) nor inheritance (you didn't inherit) you don't pay mortgages or rent, ever, and your trust borrows money, spends it on new houses, and gives you all tax free bonuses (new cars? holidays?)

p.s. this is all just conjecture and opinion. be smart, talk to lawyers and accountants about setting this up for yourself. everyone has difference circumstances and life events to deal with.