Selling a mortgaged home

9 Replies

Hi all,

I've been running some numbers trying to understand long-term gains on residential real estate investments, and came across a scenario that I can't wrap my head around. 

If I take out a $331,500 mortgage at 4% over 30 years (on a $440,000 property), my monthly mortgage payment will be $1582.63. Multiply this by periods 360 = a total payment over 30 years of $569,747.41. 

Say in 5 years time I decide to sell the property, at $440,000, having paid down a small part of the mortgage principal. The total payment remaining on the mortgage would be $474,489.51. Would selling the house result in a net loss due to covering the interest on the mortgage? Or is my understanding of mortgages completely wrong? 

The main thing here is wondering which mortgage balance would be subtracted from the sale of the home (is it the principal remaining, or the total payment that was scheduled to take place over 30 years?)

Thanks in advance, 

Newbie

Or is there another exit strategy to recoup investment on a bad deal 5 years down the line?

It’s the principal remaining. The ~$145k in interest payments ($475k-$330k) is accrued over a 30 year period, and is not created on day 1 of your mortgage schedule.

Note that you will still have a hefty interest accrual over a 5 year period. Don’t forget that we generally discuss income producing assets, so typically the property rents will cover these payments (and insurance, taxes, maintenance, vacancy, etc) which means cash in your pocket each month. When evaluating the value of a potential purchase you have to also include this life-of-investment income stream.

Thanks for the reply Jonathan. My purpose is to attain rental income through buy and hold, but I left it out of this question just for simplicity of understanding the mortgage component. 

So to clarify - when issuing a standard mortgage, there is no contract to pay the total interest accrued over the agreed maturity?

Originally posted by @Nur Al Sharif :

Thanks for the reply Jonathan. My purpose is to attain rental income through buy and hold, but I left it out of this question just for simplicity of understanding the mortgage component. 

So to clarify - when issuing a standard mortgage, there is no contract to pay the total interest accrued over the agreed maturity?

Correct. In your example, are you saying it'd be a "bad investment" if it doesn't increase in value over 5 years [in which the answer could well be: yes, it wasn't a good investment]? Or, a bad investment because you thought (incorrectly) that you'd have to pay back 30 years of interest, even if you sell it after 5 years? [Hopefully you're relieved about that?] All the best...

At this time, I would consider something to be a bad investment based on the cash on cash return (and cap rate). Appreciation would just be a nice bonus, but my main goal in real estate is cash flow. Are there other metrics you use?

I was just thinking about possible exit strategies if a property down the line proves to have significant vacancy, therefore harming the returns, so I would likely sell and reinvest into a different property.

@Nur Al Sharif , I reckon the best way of ensuring future appreciation (ensuring one profitable exit strategy), is by buying at a significant discount from all-in market value - on day one!

It's not for nothing that the mantra around BP is: Make your money when you buy! Cheers...

@Nur Al Sharif

One other thing to consider is if the mortgage/loan has a pre-payment penalty.

A pre-payment penalty is a fee a financial institution will charge you for paying the full balance of the loan prior to the loan pay-off date.

Some loans have it; some don't. It is good to ask about it if you are considering paying off the mortgage early.

Do a google search for a “mortgage amortization table” and download an excel template. If you play with it a bit you’ll have a much better understanding of how the paydown works along with a approximation of the payoff amount after x many periods.

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