Imputed Rent

OKAY, REAL ESTATE price appreciation is nothing to write home about. Okay, the benefits of leverage might be offset by the cost of the mortgage. In fact, once you figure in all the expenses involved in buying, owning and selling a home, there’s a good chance you are losing money big-time. But you get to live in the place, right?

That is indeed the big payoff from homeownership. If you live in your own home, you are essentially renting the place to yourself. Think about how much you might pay each year if you didn’t own your current home and instead had to make monthly payments to a landlord. While your home might appreciate just 2% or 3% a year over the long haul, the annual value of this imputed rent could be equal to 7% of your home’s value. That 7% is the big allure of investing in rental properties.

But if you’re the person living in the house, nobody is paying you this 7%. In essence, your home is part consumption—you get to live there—and part investment, which is the price appreciation. And the consumption part is significantly more valuable than the investment part.

Our Humble Opinion: Whether you’re buying a principal residence or a vacation property for your own use, you need to keep in mind the crucial distinction between price appreciation and imputed rent. You are unlikely to make much from home price appreciation, once you factor in all costs. You will enjoy large sums of imputed rent, but you’re the one consuming that imputed rent. The implication: You should focus on buying homes that you can comfortably afford, that are the right size for your family and that’ll give you a lot of pleasure—because that pleasure is the big return from owning real estate.

Next: Jonathan’s Homes

Previous: Leverage

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