# Sell Your Home for Fun and Profit

Real estate investing is a subject near and dear to the hearts of many personal finance aficionados. A basic question in real estate investing is deciding whether or not selling a home is a wise choice, at a given point in time. We can go through an exercise of a hypothetical home with a common financing structure, and show what the break even value is after considering the remaining principal on the mortgage along with all costs spent on the home to date.

Let’s go through an example with a hypothetical investor Bob that happens to live in a high cost of living region such as California. Suppose Bob purchased a modest home for \$1,000,000 a few years ago. He decided to go with a fairly standard financing approach and put a 20% down payment and got a 30 year fixed mortgage. Bob and his family have outstanding credit, and were able to secure a loan from a national bank at a 3.0% interest rate (what a steal at the current rates as of this writing!).

Using a mortgage amortization calculator, we can calculate the monthly payment that Bob makes to cover the principal and interest for his mortgage, which turns out to be \$3,372.83. If Bob decides to sell his house before his mortgage is paid off, we’ll need to refer to the amortization schedule to figure out how much principal and interest he has paid off. If Bob has, say, made 5 full years worth of payments on his mortgage, that is the equivalent of 60 monthly payments for a total of \$202,369.94. Based on the amortization schedule, that breaks down to \$88,749.09 in principal paid and \$113,620.84 in interest paid. In other words, out of the \$800,000 that Bob had to borrow from his lender to purchase the home, he still owes \$711,250.91 to the lender.

From that, we can calculate the break even cost by adding the remaining principal that Bob will owe to the lender to the total amount that Bob has spent on the house to date. When Bob first purchased his home, he had to put a down payment of \$200,000, and pay the closing costs on the transaction. Typically, closing costs for home buyers range from 2% to 5% of the purchase price. If we take the midpoint and assume that he paid 3.5% of the purchase price as the closing costs, Bob’s initial costs to purchase the house comes to \$235,000.

With the initial costs in hand, we can then calculate the total costs to date. After paying his mortgage for 5 full years, Bob has spent a total of \$235,000 + \$88,749.09 + \$113,620.84 = \$437,369.93. However, we cannot forget to include the precious home mortgage interest deduction afforded to homeowners like Bob, courtesy of Uncle Sam. Assuming an effective tax rate of 30%, Bob would’ve saved \$34,086.25 in taxes over the 5 years by electing to itemize his deductions. Since Bob’s mortgage is under the \$1,000,000 mortgage limit, he would’ve been able to deduct the full amount. Thus, his total costs to date comes out to be \$403,283.68.

Here’s the million dollar question: at what price should Bob sell his home to reach break even on his total costs to date? As we showed earlier, Bob will need to pay \$711,250.91 of his proceeds to the lender to make good on the remaining principal of his mortgage. On top of that, he needs to cover his total costs to date. Thus, \$711,250.91 + \$403,283.68 brings us to the break even point of \$1,114,534.59. An 11.45% increase after 5 years doesn’t seem too high, especially in an area of high housing demand such as California. Over 5 years, that return comes out to be only 2.19% on an annualized basis, which is quite modest.

In reality, Bob will likely have to pay closing costs when selling his house too. Every extra nickel that Bob pays during the selling process will eat into his profits, and thus raise his break even point. Thus, one of the key takeaways is that any transactional or closing costs on either side of the deal will eat into your profit margin and increase your break even point.

You can use the above example as a sample framework for calculating the break even point for selling your own home. There are several factors that we’ve skipped over altogether, such as the costs of homeowners insurance and property taxes. Additionally, a more precise calculation should probably include the present value of the initial down payment and closing costs made, along with specific tax situations that may have applied such as deduction limits and phaseouts. However, this example should be a good starting point for getting a sense of the break even ballpark when you consider selling your home.