The real price for a home (investment, mortgage, mortgage, landlords)

[max305]

Hi,
if you buy a home in Florida for 100.000 Dollar you pay around 2000 Dollar a year taxes. Don't you have to do "interest capitalisation" on that. So the real price for the home is more like 150.000-200.000 Dollar? Am I missing something?

[Hemlock140]

Mortgage interest is on the amount borrowed. Actually, if you have an impound account for the lender to pay the taxes and/or insurance, they pay you interest on that money because you add it to the payment every month, but they only pay it out 1-2 times a year.

[John7777]

Originally Posted by max305

Hi,
if you buy a home in Florida for 100.000 Dollar you pay around 2000 Dollar a year taxes. Don't you have to do "interest capitalisation" on that. So the real price for the home is more like 150.000-200.000 Dollar? Am I missing something?

Get a business calculator and learn how to calculate the net present value of a future cash flow. Something like that. Houses can be expensive, all things considered. It's not just the purchase price and the taxes. It's also the repairs, the interest, and the fact that you're spending money on one thing rather than possibly investing in something else. I think they call that the opportunity cost. On the other hand, once you buy a home, the can't raise your rent every year.

[jackmichigan]

Originally Posted by max305

Hi,
if you buy a home in Florida for 100.000 Dollar you pay around 2000 Dollar a year taxes. Don't you have to do "interest capitalisation" on that. So the real price for the home is more like 150.000-200.000 Dollar? Am I missing something?

You're missing commas.

Nonetheless, if you purchase a house for $100,000 the price is actually $100,000. There are lots of holding costs in owning real estate--taxes, insurance, interest (if financed) and maintenace costs--so those need to be factored in if you're buying a house as an investment. If you're buying a house to be your principal residence, you need to acknowledge that you need to pay to live somewhere--so you need to guage the costs of ownership (and potential for appreciation) against the costs of renting. There's also the satisfaction of owning your own place and not being subject to the whims of landlords or the uncertainty of rent increases.

[max305]

Sorry about the commas (I am from Germany)

I think the whole concept of "interest capitalisation" is hard to understand.

But I think that there is a big difference between property taxes and maintenance costs. You don't have to have water in your house but you have to pay taxes until the end of time.

[thelopez2]

I am not sure of what you are trying to say. If you bought a house for cash for $100,000, then paid $2,000 a year for 50 years, you would have paid $200,000. If the house stays with your grandchild and owned it for 100 years, it would cost $300,000.

[Hemlock140]

Originally Posted by max305

Sorry about the commas (I am from Germany)

I think the whole concept of "interest capitalisation" is hard to understand.

But I think that there is a big difference between property taxes and maintenance costs. You don't have to have water in your house but you have to pay taxes until the end of time.

Actually, you do have to have water in your house here, or the health department will lock you out until you get it. When water companies shut off water for non-payment and it says off more than a week or two they will report it.

[jackmichigan]

Originally Posted by max305

I think the whole concept of "interest capitalisation" is hard to understand.

But I think that there is a big difference between property taxes and maintenance costs. You don't have to have water in your house but you have to pay taxes until the end of time.

Accounting practices may differ in Germany, however my understanding is that interest capitalization occurs when interest on a debt is not paid, but rather added to the loan balance and thence treated as an additional cost of the asset for depreciation purposes. This most usually occurs during construction of an asset (e.g. a manufacturing facility or other building) which will not be placed into service for some time.

The Financial Accounting Standards Board generally governs accounting practices.
Summary of Statement No. 34

I don't believe that property taxes can be capitalized in such a fashion. Of course, it's an additional cost...but property taxes are not something that can be capitalized and depreciated.

[nybbler]

Interest capitalization has nothing to do with property taxes. I don't think interest capitalization is allowed on mortgage loans.

I think maybe you just have the wrong term. However, I can't think of any similar concept which includes property taxes; since they never go away there's no way to total them up unless you have a specific limited time period.

[mainebrokerman]

i think you may be referring to a discount rate or factor,

this is from wikipedia


Discout Factor
Because of the time value of money, the present value of future cash flows must be calculated for accounting purposes. The tool used to account for these future cash flows is known as the discount factor. This depends entirely on the relevant interest rate. The formula for calculating a discount factor is (1+r) ^ n, where "r" is the interest rate and "n" is the relevant number of periods. For example, the discount factor in a situation in which the interest rate is 5 percent annually over 10 years would be 1.05 ^ 10 = 1.63.


To account for the present value of future payments, simply divide the future payment by the relevant discount factor. Using the previous discount factor, a promise to pay $10,000 ten years from now when the interest rate is 5 percent would have a present value of $10,000 / 1.63 = $6,134.97.