I understand but if I had that same $50k as a down payment and only made a $10K down payment, theoretically I can use the remainder of my $40K and use it towards the mortgage and then flip it for the same price after 2 years. I also consider all those months of self-paying mortgage payments money savings from not having to pay out of pocket for the mortgage. Sure the financing would be more on the house but if the amortization is over a period of 30 years the difference in mortgage payments aren't significant (~$250/month more). Wouldn't this change the entire dynamics of my investment?choclover wrote: ↑ It really depends on how the OP views profit. There are textbook definitions of profit that can be googled and then there are a lot of misconceptions about what profit means. I think applexs's definition is more accurate because basically any cost associated with purchasing or maintaining the home (i.e. costs that you wouldn't have incurred had you never bought the place) should be included in the math. Furthermore, OP may want to google the difference between asset and expense. A house is considered an asset (as is the land on which it sits if you own the land beneath) BUT things like property taxes are expenses. Profit is usually calculated by subtracting expenses from revenue but if you were to flip the property you would take the selling price less the cash outlays (including expenses) to come up with the gain/loss on sale.
The down payment itself would be considered part of the purchase price of the home but is more of an "asset" rather than an "expense". However, this may not be the only cost to include when factoring in all of the costs that need to be considered in the profit equation.
I would sum up all the money paid towards the house and then separate it between principal and interest. The principal is just a repayment of the purchase price but the interest is the money that you are out of pocket that the bank gets to keep. In other words, any interest paid is an expense.OrangeBerry wrote: ↑ I understand but if I had that same $50k as a down payment and only made a $10K down payment, theoretically I can use the remainder of my $40K and use it towards the mortgage and then flip it for the same price after 2 years. I also consider all those months of self-paying mortgage payments money savings from not having to pay out of pocket for the mortgage. Sure the financing would be more on the house but if the amortization is over a period of 30 years the difference in mortgage payments aren't significant (~$250/month more). Wouldn't this change the entire dynamics of my investment?
You shouldn't look at it like that.OrangeBerry wrote: ↑ I understand but if I had that same $50k as a down payment and only made a $10K down payment, theoretically I can use the remainder of my $40K and use it towards the mortgage and then flip it for the same price after 2 years. I also consider all those months of self-paying mortgage payments money savings from not having to pay out of pocket for the mortgage. Sure the financing would be more on the house but if the amortization is over a period of 30 years the difference in mortgage payments aren't significant (~$250/month more). Wouldn't this change the entire dynamics of my investment?
Let's assume your scenario, I can afford the $500K house but instead of 100% down I put $50K. In theory I would have $450K in mortgage payments but as I indicated in my previous reply, I would probably end up selling the house after 2 years and make a profit. 2 years in payments equates to around $55K so why even put the $450K in the math equation?superfresh89 wrote: ↑ You shouldn't look at it like that.
Let's say you could afford to buy a $500K house in full... Instead of putting 100% down, you choose to only put down $50K, and reserve the remaining $450K for mortgage payments... So all of it is profit?
Instead, like someone else mentioned, you should compare total net worth before and after.
Why would you factor in the equivalent in rent you would have paid though? Regardless if you own or rent you need to pay to sleep somewhere so it shouldn't be calculated.BlueSolstice wrote: ↑ For a rental, I would look at the total income and capital gain reported to CRA, minus any losses I have claimed. For primary residence, it's a bit more complicated. It's difference in sale price (sold minus bought), plus the equivalent rent I would have spent, minus property tax, mortgage interest, house maintenance, and other expenses related to the house.
That's the whole point. For a decision to buy, I factor in all the benefits I received, including rent I otherwise would pay, and subtract all the costs I wouldn't have paid if I had rented. The total return is then compared to what I would otherwise be doing with the down payment.OrangeBerry wrote: ↑ Why would you factor in the equivalent in rent you would have paid though? Regardless if you own or rent you need to pay to sleep somewhere so it shouldn't be calculated.
Of course the down payment does not count.OrangeBerry wrote: ↑ Say I bought a house for $500,000 and put a $50,000 down payment and after a few years I sell the house for $600,000. Do people consider making $150,000 profit or $100,000? I would think it's the latter as you would need to consider recovering that money back before fully considering any types of profit.
WetCoastGuy wrote: ↑ Profit is difference between what you bought the asset for and what you sold it for - it doesn't take into account how it is financed, except for any interest charged.
But did I buy the house for $500K or $450K? Aren't you including the DP? Remember that my mortgage is based on the $450K not the $500K due to the DP.Frank2029 wrote: ↑ If you bought a house for 500k and then later sell it for 600k this means you have make 100k in profit. What is so hard to understand?? Everything else is the cost of doing business.
If you buy a phone for $500 and later sell it for $600 do you deduct the charging battery costs of 3 cents a night on top of your monthly billl when calculating profits???
The F**K??????????????OrangeBerry wrote: ↑ But did I buy the house for $500K or $450K? Aren't you including the DP? Remember that my mortgage is based on the $450K not the $500K due to the DP.
Heres the thing look at it the other way, if you sold the house for $450,000 did you break even? or did you lose your down payment $50,000) and have to pay the $450,000 back to the bank.OrangeBerry wrote: ↑ But did I buy the house for $500K or $450K? Aren't you including the DP? Remember that my mortgage is based on the $450K not the $500K due to the DP.
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