This was interesting question and answer in reddit. Just sharing with forum members
Newbie question: Can someone please help me understand how you can profit when selling a home?
I understand that when you buy a home the majority of your mortgage payments, in the beginning, go to pay off interest first. So how does one make a profit from real estate (assuming the house goes up in value) when they sell a property? Isn’t the profit just going to cover the cost of the interest payments thereby nullifying any “gains?” Unless the value has gone up significantly, wouldnt a seller just be breaking even?
TL;DR - What’s your approach to making profit in real-estate when you’ve got interest payments getting in the way?
Either from gains in value of the property, or/and by collecting rents.
Say, you buy a $500k property with $100k down. At an APR of 3.7% you pay roughly $1,825 per month in interest in principal, you have a remaining balance of $311,903 after 10 years. You paid a total of $132,839 in interest. Say the property has increased in value to $600,000 and you decide to sell it. Taking into account the remaining balance on the mortgage ($311,903), you have grown your initial down payment of $100,000 to $288,097. However, you have incurred the cost of interest, which we subtract from the $288,097. Which comes down to ($288,097-$132,839 =) $155,258.
To calculate your return: ROI = (gain from investment - cost of investment) / cost of investment. Return = $155,258 - $100,000 / $100,000. Return = 55.26%. Not too impressive, given that you took 10 years to get this return (annualized 4.5%)
In same fashion, you can rent it out and have someone else pay the mortgage on your property. Double win there: potential for increased value of the property, as well as slowly getting the ownership of the property in question.