Comment of the Day: What You Really Made on Your House

COMMENT OF THE DAY: WHAT YOU REALLY MADE ON YOUR HOUSE “. . . Most people say ‘I bought it for x and sold it for y, so I made an (y-x)/x return on my house’ which really isn’t the case. That formula can tell you your total appreciation in market value, but that is not the same as your ROI. To get closer to calculating an accurate nominal return, you need deduct the following from y: total in real estate taxes you paid while you owned the home, total expenses for repairs and maintenance, total amount of insurance premiums, the total interest and fees you paid to a lender before paying off your mortgage, and any commissions you paid to a realtor. You can then add back any income tax benefit you got for deducting your interest payments as well as any income you got from renting out all or part of your property. If you wanted to take things to the next level you could discount these cash flows and also convert nominal dollars to real, but I think even with just doing the above exercise most people will find that they didn’t really make as much money on their house as they think they did, and unless you manage to time your purchase, sale, and hold period just right, home values really have to appreciate significantly each year for the regular homeowner to just break even on it as a pure investment. That said, I think there are a lot of other very good arguments in favor of home ownership, including some financial ones. My point is just that if you bought a house for $100K and sold it 10 years later for $200K, you didn’t actually get a 10% annual return unless your property was tax exempt, you paid cash (and had a separate account set up to hedge inflation and compensate you for the cost of that capital being tied up for ten years), sold it yourself, didn’t buy homeowner’s or flood insurance, and never made any repairs.” [You Didn’t Earn That, commenting on Comment of the Day: What You Inner Loopers Got Wrong]

27 Comment

  • i agree the calculation is complex. but you are forgetting that most people get mortgages with 20% down. assuming a 30-year mortgage, they are still fairly highly leveraged after 10 years. I doubt they would have $100,000 all-in after 10 years even after taxes and repairs, so they still made out very well if they can sell for twice the price.

  • Agreed, I live out in the burbs, my neighbor sold his house and claimed he made 30K because he sold it for 30K more than what he paid for it. He didn’t take into account the 30K spent on a pool and the 10K or so he spent on other upgrades.

  • Well, yea, assuming you could have stayed with your mom, rent-free.

    Certainly everyone who actually owns a house knows you have to buy insurance and pay taxes, Captain Obvious. And that’s not a 10% ROI, but thanks for trying.

  • Well look at the brain on Brad!

  • Great post. Next you can explain how my Starbucks latte really cost $6000 after including gas for the car trip, water for the extra caffine toilet flushes, and future diabetes treatment from the sugar. I kid.

  • Sorry to nit, but $100 to $200 in ten years is a 7% annual return (before factoring in expenses and other costs).

  • Montrose is correct. All the time you were living in the house, you were getting a benefit from it. It’s hard to exactly know what that benefit is worth, but you could find an equivalent pretty easily–what it would cost to rent a house of similar size. So to do a true financial analysis of your return, you have to assume you saved yourself $R in rent that you would have paid if you didn’t have a house you owned to live in. Opportunity cost and all that.

  • Nerd alert!

    Seriously, I think you make a valid argument. I would throw out all of the property taxes, insurance and basic maintenance though. In theory, those should be priced in whether you buy or rent (a landlord is happy pass these costs along) according to location and size of home, so they should be excluded from a DCF calculation. Essentially, I’m paying $1,500 per month for my apartment, but I would allocate at least $200 a month of that for property taxes, insurance and building repairs. It just feels different when you’re paying them as a homeowner.

  • OK – if you bought a $100,000 house 10 years ago and sold it for $200,000 today, what would you have? Assuming you put $10,000 down, your 30 yr. mortgage at 5% would have about $70,000 left on it. So you would net $200,000 less 6% commission = $188,000, less whats left on your mortgage = 118,000. Your property taxes were probably 2,000 a year and homeowners was about 1500 so that still leaves you with close to 83K that you get TAX FREE on a $10,000 investment. (yeah, i know i left out repairs, but i figure thats washed with you know, having a place to stay) That’s not a gold mine, but it’s a pretty good investment.

  • I don’t think that anyone buys the house they live in as an investment. It is just a very nice fringe benefit of home ownership that you have the potential to realize a financial gain from what is otherwise a necessity.

  • The biggest two problems with homeownership, in my opinion, are: 1) People tend to purchase a larger home and more land than they would otherwise want to rent. Extra space leads to extra expenses and waste. 2) Loss of personal and financial flexibility. People don’t consider the worst case scenario, for instance what could happen if they needed to cash out their equity in a recession or if they had to move to another city for a job or due to family issues.

    Unless a person can be reasonably assured that they are going to live in the same city for at least five years, they shouldn’t be buying a house.

  • I tried explaining the same thing to my friends ten years ago when none of them could fathom why I didn’t buy a house and rented instead. They thought I was speaking in Greek and was a crazy radical. I remember in my apartment I didn’t even have to change a light bulb – just make a call and come home from work to find it done.

    @Will – you shouldnt assume them prices in to rent, but should rather calculate your total out of pocket.

  • @anon not sure how you would only owe $70k on a 30 yr note after ten yrs if you started with $190k.

  • You certainly make more money on a house over a period of time than you would renting, especially in Houston where rents tend to be higher than elsewhere. So, if I live in my house until it’s paid for, I have an asset that I can sell, and that has provided a benefit. If I rent for 30 years, I walk away with nothing but memories.

  • Anon – wait I suck at math you were right

  • From Superdave:

    I tried explaining the same thing to my friends ten years ago when none of them could fathom why I didn’t buy a house and rented instead. They thought I was speaking in Greek and was a crazy radical. I remember in my apartment I didn’t even have to change a light bulb – just make a call and come home from work to find it done.

    As a former landlord, it is difficult to explain to renters of homes or duplexes that they need to learn to change a light bulb and mow a lawn. Not to mention, buy a toilet plunger.

  • Owning tends to stabilize one’s housing cost – maintenance and taxes go up, sure, but not to the extent that rents in my neighborhood have over the years. But it’s not for everyone – I’ve got an old house, with plenty of projects to keep me occupied…I’ve frequently referred to it as a wonderful place to put all that spare money I thought I had.

  • Owning is a great way to invest…if you buy in a gentrifying neighborhood. The problem is that few people do. The most popular places to buy homes, such as the Woodlands, are continually building more new homes, which puts downward pressure on the existing housing stock (why buy used when you can buy new for the same price?). Even in gentrifying neighborhoods, such as the Heights, the overwhelming majority of buyers do not want a fixer upper, where all of the profits are. They want YOUR house, after you’ve done all the work. That is fine for those those few who do that, but only if they bought into the neighborhood soon enough.

    Those buying and renovating in the Heights after about 2006 will have a hard time getting anything more than what they’ve put into it. Nothing wrong with that, as it’s a great close in neighborhood. But, on a strictly financial basis, it is a wash. In the not yet built out suburban neighborhoods, once realtor fees are deducted, it is likely a net loss.

  • You are all wrong and missing the key point:


    You make your money on the LAND.

    The house falls apart, eats you capital, etc.

    While the location, which is eternal and can never be duplicated by builders, just goes up and up as Houston grows and grows…..

    ALWAYS buy location for appreciation…….

  • short attention span?

  • So, Old School, you “don’t think that anyone buys the house they live in as an investment” ????
    You are way off there. Not everyone, but many many people buy the house they live in with investment being major factor in the choice.
    I am one of those people, and so are the majority of my clients. (Although probably not the majority of buyers)
    Choosing an investment quality transaction takes more time & due diligence, to be sure, but a lot of people make it a priority.
    Not surprisingly, in my professional experince the clients who care the least about investment quality are buyers with corporate relo packages. (Not being perjorative- just illustrating a different priority you see here in Houston)

  • bozo’s killin’ it.

    The exception to the rule is market changes in architecture and design. So for instance if you had built a 1500 sf ranch in 1975 on a vacant lot that house was worth a lot more than the 1500sf bungalow next store.

    Whereas now the bungalow would be worth more than the ranch even though one is 35 years old with reasonably modern electrical, plumbing etc and one is 80 years old with all that entails.

    Alas there’s really no way to predict this but if you wanna bet that home purchasers of 2085 are smitten by the authenticity of “early millenium stucco-box chic” then by all means go long. “Oooh, granite countertops… how charmingly quaint!”

  • The Niche, while I like, for reasons you would categorically reject, the idea that people might be satisfied by less — why would you care whether they make different consumer choices based on whether they are renting or owning? Only because you feel they may delude themselves, with help from others, into thinking their excess consumption is a sure-fire investment? Plenty of posters on here seem to have realized terrific gains precisely because they chose to consume more — and less cautiously (maybe, I don’t know their circumstances) — than the rest of us. But even if most people are not going to make out so well: as long as they are not so deluded then you have no issue with their home ownership follies? How can it matter to an economist what people think of what they are buying? And beyond “extra expense,” what do you mean by “waste?”

  • @ Luciaphile: I will not deny that real estate investment can turn out to be very profitable, however there are only so many bungalows in the Heights (and such other gentrifying places). The profile of risk and reward is very different for the VAST majority of homeowners. And besides, if someone is going to invest in more real estate than they themselves need, then that is why one buys an income-producing property.

    To answer your specific questions: 1) I care because market distortions prompted by poor consumer choices and the public policy that promote them result in inefficiencies that are pervasive throughout the economy. They constitute a huge opportunity cost and economic dead weight that suppresses both consumption and business investment. 2) Extra expense might be matched or even exceeded by extra enjoyment, however waste is not.

  • The Niche: an opportunity cost in that there will be less to spend on Halloween merchandise? Answer: Yes. (I’m getting smarter, like Algernon!) My questions, I suppose, concern the limits of economics, and I can’t summon the necessary glibness to post here, so I’ll take it to “Anything You Want.”

  • As mentioned, the gain from real estate often is a function of leverage. So while your house might go up 10%, if you’ve only put down 20%, that’s a multiplying effect on your down payment.
    If I buy a $100k house with $20k down, and it goes to $110k next year, that’s $10k of gain I made on a $20k investment.
    On any of our high return projects, we bought with little down so any appreciation in the project at sale reflected a giant ROI.

    (for simplicity sake, I’m not adding in the closing costs if the property were sold, which would occur to realize those gains, I’m also not adding in the tax advantage of the fact that almost 100% of the first year of payments can be written off against income. The above was only to illustrate leverage effect on a capital gain)