What is the Return on Investment of Your Home?

Wade Betz

Published 7 months ago

Do you see your home as an investment, or as a living expense? There is no right or wrong answer, but clearly defining how you view your home can help you weigh major financial decisions.

For many Americans, their home is their single largest asset. So why do so few people calculate their true return on investment after selling? To some, the entire transaction is just a living expense or sunk cost, but if you view your residence as an investment, wouldn't you want to know the ROI?

Here are some new ways homeowners can view the true return on investment. This is not intended to reflect each buyer's specific situation, and will likely be most useful for investors who purchased a home with a goal of "trading up" in a few years. Although home ownership can provide significant tax benefits to many Americans, for simplicity, potential tax benefits have been excluded from this calculation.

Price appreciation does not equal ROI. The ROI on a home is most commonly viewed as price appreciation – how much you sold it for less how much you paid for it. Sometimes selling costs are taken into account, too. The issue with this approach is that it doesn't include all of the expenses incurred while owning the home, buying the home and preparing to sell it.

Conceptually, it can be difficult to determine how to calculate the true ROI on a home – the dwelling itself is a hybrid personal use asset and investment asset. However, ignoring the real cost elements falsely inflates the return on owning real estate and can lead to homeowners to continue over-investing in a property.

True return on investment for homeowners. Your home is likely among your largest assets, so it makes sense to know how it performed. To calculate the ROI on your home, consider starting with the most conservative approach. You can always adjust afterward to better fit your personal situation.

Here's an example of calculating true ROI on the sale of your primary residence:

1) Add up your acquisition costs. These are the costs incurred when you bought the home – your down payment, attorney fees, closing costs and so on.
2) Add up your total costs of ownership. Breaking it down into subcategories, calculate the total payments made to principal and interest, taxes and insurance, repairs and maintenance, plus other expenses, such as HOA dues or condo fees.
3) Add up your selling costs. Selling costs can be quite significant. Real estate agent fees alone are typically around 5 percent of the sale price. There will be additional expenses in closing costs and even if the sale is exempt from federal capital gains tax, you may still need to pay state and local tax.
4) Find out your loan payoff amount. If you've already sold your home, you have this number. If you're just thinking about selling, you can calculate this using an online amortization schedule or call your bank.

Once you have all your numbers, it's time to analyze.

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