Was that House a Good Investment The Answer may not be so obvious
Below is a MRR and PLR article in category Finance -> subcategory Real Estate.
Was that House a Good Investment? The Answer Might Surprise You
Summary:
When considering housing as an investment, opinions and evaluations vary greatly. This article explores how to properly assess the investment performance of your own home, separate from investment properties.Understanding the Investment Value of Your Home
Many people struggle to differentiate between the enterprise value of a house (the sale price, including debt and equity) and its equity value (what remains after paying off the mortgage). To determine if your home was a good investment, focus on the equity value.
A Closer Look at Home Appreciation
Most homeowners simply compare their home's value appreciation with its purchase price. For instance, if you bought a house for $500,000 and a neighbor’s identical house sells for $550,000 a year later, you might assume a 10% return. However, this calculation is oversimplified and often misleading.
The Impact of Transaction Costs
It’s essential to consider the transaction costs associated with selling your home. These include expenses for preparing the house for sale, such as painting, landscaping, and staging, alongside real estate commissions and closing costs. For example:
- Cost to spruce up the house: $10,000
- Real estate commission and closing costs: around $33,000 (6% of the sale price)
This reduces the $550,000 sale price to $507,000, resulting in only a 1.4% return on your $500,000 purchase. But there's more to it.
Focusing on Your Equity Investment
To accurately calculate your return, compare your profit or loss to your invested equity, not the full home price. If you put 5% down, equaling $25,000, your $7,000 profit translates to an impressive 28% return on investment in one year.
Enhancing Returns
Savvy homeowners can boost their returns by reducing agent commission fees. In our example, lowering the sales commission from 6% to 5% increases your return on the $25,000 equity from 28% to a remarkable 50% ($12,500 profit).
Key Takeaways
1. Account for All Transaction Costs: Always include every cost associated with selling your home in your calculations.
2. Understand the Difference Between Home Value and Equity: Your true economic return is based on the equity you invested, not the total home value.
3. Recognize the Significance of Sale-Related Costs: Small commission differences can greatly impact your return on equity.
By considering these factors, homeowners can better evaluate the true investment value of their homes and make more informed decisions.
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