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$78,000 Over 10 Years, What's It Worth?

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[OP]
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Nov 16, 2004
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$78,000 Over 10 Years, What's It Worth?

Lets just cut to the chase.

I'm house shopping. Considered a $650,000 property OR a $750,000 property.
Difference is $400 a month and $30,000 deposit.

That's $400 x 12 x 10 = $48,000 + 30,000 = $78,000

I have this posted in the real estate section but at it's core, it's an investment question, so I'm posting the "investment" portion here
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[OP]
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MrMom wrote: Simple "Time Value of Money" (FV) question.

https://www.calculator.net/future-value-calculator.html

PV = $30,000
% = you must decide.
Pymt = $400
Pymt at "Beginning" vs "End" of each pay period is very important.
You can figure out the rest.
The % your given calculator gives is 6%, however that seems to be 6% each and every deposit, so the final number is astronomical.
For most investments, wouldn't the "return" be measured on an annual basis? Why is why I'm not sure why the calculator is pumping out numbers this way.
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[OP]
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introspect wrote: According to https://financialmentor.com/calculator/ ... calculator, a bit over $120k nominal dollars assuming 6% rate of return after tax.

You might also want to estimate the difference in property tax, insurance, utility costs, etc.
Interesting. Thank you.
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6% makes sense in terms of an opportunity cost of the money were otherwise invested, however that's not often the case when buying a property (unless buying with cash and you also have excess cash to invest). So for a typical buyer I would use 2% which is more or less the current mortgage borrowing cost. So much less than 120k for most people.

Many other things play into a real estate decision, commuting costs and time. Location location location in terms of 10 year capital gains on the property itself. It's easy to envision scenarios where there is more wealth accumulation with the more expensive property over 10 years, especially if the additional amount is not actually available for investment.
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Allow me to clarify.

A - I said "% = you must decide."
B - Why assume that 6% is some market or a reasonable number just because it's there in the calculator? It's like being told that the Present Value, default payment and number of periods must be used.
C - What could be the range of reasonable interest rates then?

  1. Government of Canada 10 year bond yield?
  2. A highly rated 10 year corporate bond?
  3. Constantly rolling over some short term interest bearing instrument?
  4. Some dividend paying public equity?
  5. Other i.e. your own private opportunity cost

D - Repeat: "Pymt at "Beginning" vs "End" of each pay period is very important."

C goes right back to A, you must decide, because only you know the nuisances of yourself and the surrounding choices that must be made.

If you want to make it more complicated ;), take into account some level of expected inflation over this period as well.

Update

Hint, KISS. Don't over think this.
If you don't understand the "Time Value of Money" concept, do a web search and learn it. This is taught in HS.

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