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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.
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Isn’t this double-dipping? I own my car outright – does that mean I’m making lease payments to myself? I don’t think so.
No, there’s no double-dipping. If you didn’t own a car but still needed a vehicle, you’d have to rent/lease. The upshot: By owning a car, you’re getting a benefit of considerable financial value — roughly equal to that rental/leasing cost. Ditto for housing. If you need shelter and don’t own a place, you have to rent. Homeownership clearly comes with a valuable benefit — the ability to live in the place without sending off a check every month to a landlord.
I wouldn’t call it a benefit… at least not an “added” benefit. Everyone is paying for housing one way or another. For example, even if you were gifted a $1M house, by living in it, your opportunity cost would be an estimated $70K/year (using a 7% return on having $1M invested in the S&P500).
Going back to the car example, the value you get is in using it – I think we’re on the same page here. To get that value, you need to pay for it somehow. When I pay for that value using Option A (100% upfront), I can’t say that the benefit of paying via Option A is that I don’t have to pay for it via Option B (monthly lease payments) because essentially I have front loaded my payments.