How to calculate opportunity cost of owning my house

[icyappraiser]

I wanted to add up the total cost of owning my house over the 8 years since I purchased it. Maybe some of you also find this sort of exercise fun :)

In costs, I included:
*Title/Inspection Fees
*Mortgage Origination Fees
*Mortgage Interest
*Property Tax
*Insurance
*Maintenance
*Improvement

This is all offset by:
*Appreciation (less estimated selling fees)

I also need to include opportunity costs, but am not sure what assumed rate of return to apply here. It makes a big difference whether I use 4%, 6%, 8%, 10% .... or even the actual return of VTSAX over that time period. In fact the difference between 4% and 10% is almost as much as the sum of the entire list above.

At first I figured I should use 8%+ since that money could have gone in the stock market, but also I'm not convinced I really would have thrown it all in at the time. For example, 8 years ago I was saving it specifically for a down payment on a house and hadn't discovered FIRE. And 4 years ago I was worried about the markets during COVID enough that I paid off the mortgage instead of dumping it all in the market (lessons learned).

Should I pick a lower rate since it might have alternatively been invested in something stable? Should I pick the dividend on a top REIT fund? Or just an average stock market return?

What do ya'll say?

[Dicey]

I say ya gotta live somewhere and try not to overthink it too much.

[GilesMM]

Use the actual returns your investments saw for backcasting. For forecasting using 7% real. Have fun with your experiment.

[Wintergreen78]

Use the actual returns your investments saw for backcasting. For forecasting using 7% real. Have fun with your experiment.

I use an assumed rate of 7% for planning purposes. But, you should base it on what you would actually do. If you put investments in the SP500 vs a bond fund, your returns are likely to be very different. Look at your actual returns over 5-10 year periods to get a reality check.

Also, whatever number you use will be wrong. If you invest in a stock index, it could go up by 15% a year for the next 10 years, or it could be flat over the next 10 years. So, at the end of the day any opportunity cost calculations you make can help you make the decision, but I would not let them drive the decision.

[GuitarStv]

I say ya gotta live somewhere and try not to overthink it too much.

That's sort of how I feel.  Find a place you like, within a price point that makes you comfortable and enjoy living there.  Home ownership comes with some headaches and challenges, but overall I like it a lot better than renting.

[blueberrybushes]

Don't forget to account for the added income tax you will pay on the invested amount (either as dividends or STCG/LTCG).

And, factor in the reduction in AGI if you itemize and can deduct the interest.

And, one more factor - what happened to rent during the same period of time in your area?  One might think this is NOT an opportunity cost of owning a house, yet it is significant especially if rent is increasing rapidly in your area.

[beekayworld]

You can deduct the mortgage interest on your tax return. Most of the monthly payments in the early years goes towards interest.

[Morning Glory]

You forgot to subtract the imputed rent (the amount it would cost to rent a similar place indefinitely at your preferred withdrawal rate if you didn't own the house and your money were in a different investment such as stocks). I don't know where you live but rents have increased more than general inflation in many parts of the US over the last few years.

[SeattleCPA]

You forgot to subtract the imputed rent (the amount it would cost to rent a similar place indefinitely at your preferred withdrawal rate if you didn't own the house and your money were in a different investment such as stocks). I don't know where you live but rents have increased more than general inflation in many parts of the US over the last few years.

+1

[aasdfadsf]

Yeah, the imputed rent thing, which seems to be persistently misunderstood when it comes to home ownership. There is no free lunch when it comes to having a roof over your head. There is no reasonable scenario in which you live under a bridge and put all your housing costs to better use.

The question is whether your investment in housing has been better or worse than the alternative of being a renter. It may or may not have been. But the alternative to owning your home isn't pocketing the cost of owning it and investing it, it's paying someone else to house you. 

[Metalcat]

I say ya gotta live somewhere and try not to overthink it too much.

That's sort of how I feel.  Find a place you like, within a price point that makes you comfortable and enjoy living there.  Home ownership comes with some headaches and challenges, but overall I like it a lot better than renting.

Same.

These kind of calculations are best for when someone has a strong bias for either renting or owning, it can really open their eyes to the cost of that bias.

But aside from that, granular analysis isn't necessarily all that useful because you rarely have an option to compare apples to apples.

It's not like you can usually find a great place to live and then have to decide whether to rent or buy. Sometimes you can, I have looked at condos that were for sale and rent, so sometimes really granular analysis is necessary for deciding between the two. Although, even then, there are lifestyle factors, like the right to renovate or the right of the landlord to displace you.

But unless it's an analysis over identical or near-identical units, being that granular with your analysis isn't really necessary because you're analyzing a choice that rarely exists.

I've owned 4 homes, and for each one there have been extremely specific factors that would make me choose that exact unit over a neighbouring/nearby one. So the lifestyle factors of specific homes are pretty huge when it comes to deciding. And they will often overshadow granular math.

That said, you're probably a very smart person who already knows this, so perhaps our responses are useless and you have a particular reason for wanting this analysis.

Like maybe you are talking to someone with a bias and you're trying to demonstrate something to them. I have no idea.

[SeattleCPA]

Yeah, the imputed rent thing, which seems to be persistently misunderstood when it comes to home ownership. There is no free lunch when it comes to having a roof over your head. There is no reasonable scenario in which you live under a bridge and put all your housing costs to better use.

The question is whether your investment in housing has been better or worse than the alternative of being a renter. It may or may not have been. But the alternative to owning your home isn't pocketing the cost of owning it and investing it, it's paying someone else to house you.

+1

[icyappraiser]

Thanks for all the responses :)

Mostly this was out of a dark curiosity to see if I actually "profited" from living in my house (i.e. appreciation alone exceeded all ownership costs), not necessarily to see how much I would have saved vs renting. If this turned out to be true (which it does if I use 4% for opportunity cost), it was going to make me feel a little better about spending a few grand on some deferred maintenance needs :)

For future-looking calculations, I've run that and the breakeven for 5-10 year ownership period in my area is when rent is about 0.6% - 0.7% of what you could buy the property for. E.g. Buying for $500K comes out the same as renting for $3000-3500. It actually comes out in favor of buying surprisingly despite current rates, since $500K will get you a nicer/larger place than $3000 of rent. And--to the points made--what is available for rent in that price range is a ~1300sf luxury 2/2 apartment downtown while $500K will get you a pretty nice 3-4 BR house (1500-2000sf)

[Jaybo]

You forgot to subtract the imputed rent (the amount it would cost to rent a similar place indefinitely at your preferred withdrawal rate if you didn't own the house and your money were in a different investment such as stocks). I don't know where you live but rents have increased more than general inflation in many parts of the US over the last few years.

Truth.

My primary residence was purchased in Sept 2019 with mortgage payment (principle, interest, taxes, insurance) of about $1390 a month.  Rents here skyrocketed right after and within a couple years the going rent on my home would've been $2,000 a month.  Current stable rents for my house today would run roughly $2,400 a month.

[ChpBstrd]

DCF or portfolio optimization calculations use the risk-free rate to calculate the surplus earned by taking the risk. I suggest your look back at what a mid-duration treasury bond fund like AGG yielded back when you bought your house to answer the question of how good/bad a deal was it.

If the question is what is the net benefit of holding the house today instead of investing in AGG, the 30 day SEC yield is 4.22% but falling.

If you wanted to answer a question like "should I have put my down payment in the stock market instead of buying this house" then you'd need to compare against the stock market's total return for the past time period. The question "should I NOW sell my house and invest the equity in the stock market" is impossible to answer because we don't know future returns. For the same reason, you cannot say you should sell your house and invest in NVDA instead because look at how well it did in the past. It is true you should have done this in the past, but we cannot answer the question in the future.

+1 on including imputed rent in the cash flows. You really have to forensically recreate an alternative history in which you rented an acceptably similar place instead of buying.

[SeattleCPA]

@icyappraiser

When I responded in thread earlier, I hadn't yet created a simple JavaScript calculator to do the home investment calculations. But since @ChpBstrd added a comment to thread, I will too.

You can use this calculator at my blog to calculate an estimated return on your home.

https://evergreensmallbusiness.com/home-investment-calculator/

P.S. Interestingly, I'm using ChatGPT to write these JavaScript programs for the blog. I.e., I basically don't write these. I tell ChatGPT to write them. I don't think it can do complicated calculators without a lot of intervention. But it's still pretty amazing what it'll do.