Annual cost of owning a home is 4% to 6% of the value of the house.

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hg064754
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Annual cost of owning a home is 4% to 6% of the value of the house.

Post by hg064754 »

I have been thinking about the real cost of home ownership.

(Property taxes + interest on mortgage + maintenance + opportunity cost of the equity + transaction cost, etc.) - (any tax deduction benefit + year-over-year home value appreciation, etc.)

It is about 5% of the value of the house. And this doesn't matter whether you have a mortgage on it or paid off.

Is my estimate way off?

EDIT:
0) This is just an average statement where major upkeep costs such as roof, windows, HVAC, etc are amortized.
1) The net cost following this calculation is the imputed rent.
2) the opportunity cost of the equity (i.e. the return one could have gotten from investing the equity of the home) must match the risk and illiquidity profile of the home. If the home is levered (i.e. has a mortgage), the risk is high so use higher risk assets e.g. US equity. etc.
Last edited by hg064754 on Mon Sep 27, 2021 8:55 am, edited 2 times in total.
frugalecon
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by frugalecon »

Hi HG,

It looks like you are trying to calculate a “net cost,” since you are subtracting things like tax benefit and appreciation from the cost. Shouldn’t you also be including the effective rent that you are paying to yourself for the housing services that you derive from the house?

I am close to paying off the mortgage, at which point the cost of owning my home will be about 2.5% of its value in taxes and maintenance. Based on rentals in my neighborhood, it would cost around 4.5% - 5% of the value to rent something sort of comparable.

Cheers,
FE
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by Kagord »

IMHO, you need to also put net equity at market value (less gain taxes, if you would have them) at 8% as a cost, as that could be mostly "near term tax-free" invested. Then try to estimate potential future gains in equity as well.
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by oldcomputerguy »

This topic is now in the Personal Finance forum.
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by KlangFool »

OP,

A) My annual cost of owning the house is ZERO. It is cheaper than renting. Hence, I am either breakeven or make money from buying the house.

B) The answer to your question is highly dependent on the price that you pay for the house. If you buy the house at a price that it is cheaper than renting, then, the cost is low. If not, the cost is high.

C) What is the market rent of your house?

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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by Grogs »

hg064754 wrote: Sun Sep 26, 2021 10:34 am I have been thinking about the real cost of home ownership.

(Property taxes + interest on mortgage + maintenance + opportunity cost of the equity + transaction cost, etc.) - (any tax deduction benefit + year-over-year home value appreciation, etc.)

It is about 5% of the value of the house. And this doesn't matter whether you have a mortgage on it or paid off.

Is my estimate way off?
- I wouldn't put the change in appraised value because that will be captured in the denominator, i.e., the current home value.

- What interest rate are you using to calculate opportunity cost? Is it the 10% average stock market return or a savings account? If it's the stock market, do you use that particular year's return? For example, if the stock market falls 20% and you have $500k in equity would you use -$100k for the opportunity cost?

If you're going to have opportunity cost of the mortgage on the left side, I think you should also include imputed rent on the right. You have to live somewhere.

FWIW, I did a quick calculation ignoring* the opportunity cost. With my standard tax+insurance+HOA fees+regular maintenance, I get about 1.5% of my home's value. I replaced the HVAC this year and that brings it to around 3%. Averaging all the intermittent costs like the HVAC, water heater, appliances probably gets me to the 2-2.5% range. I think renting a similar house would be at least double that.

*I would probably invest most of mine in bonds/savings/CDs. Using those interest rates the opportunity cost would be pretty tiny even if I did include it.
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by rockstar »

It depends where you live. For example, I find maintenance and taxes to be lower in the southwest than the southeast. Weather definitely matters.
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by randomguy »

rockstar wrote: Sun Sep 26, 2021 1:01 pm It depends where you live. For example, I find maintenance and taxes to be lower in the southwest than the southeast. Weather definitely matters.
Market returns and house appreciation will dominate these calculations. If your house is going up 5% and you are leveraged 4:1, you are printing money. House flat while the markets are going tup 10%, the opportunity costs really add up.
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by LilyFleur »

I don't have a mortgage. So my cost is about 2% right now. That includes an assessment for the aging infrastructure of our condo development. Rent would be more than 4%, but there are no units available for rent. I cannot believe people are paying $570,000 for a two-bedroom condo here, now.
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by finster869 »

I think that is a pretty good guestimate. I have 3 houses and they come in at 3%, 4% and 5%. Interestingly, the 3% is worth more than the 4% but has lower carrying costs than the 4%.
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by dukeblue219 »

You really need to subtract the cost of the land somehow (and the interest on that portion of the mortgage). My house is not costing me nearly that much per year, but at least 75% of its value is the lot, not the structure, and the lot costs me nothing other than mortgage interest and property tax.
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by rockstar »

randomguy wrote: Sun Sep 26, 2021 1:07 pm
rockstar wrote: Sun Sep 26, 2021 1:01 pm It depends where you live. For example, I find maintenance and taxes to be lower in the southwest than the southeast. Weather definitely matters.
Market returns and house appreciation will dominate these calculations. If your house is going up 5% and you are leveraged 4:1, you are printing money. House flat while the markets are going tup 10%, the opportunity costs really add up.
What happens to the value my house after I buy only matters for property taxes increases when thinking about the cost of ownership.
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by LilyFleur »

rockstar wrote: Sun Sep 26, 2021 1:22 pm
randomguy wrote: Sun Sep 26, 2021 1:07 pm
rockstar wrote: Sun Sep 26, 2021 1:01 pm It depends where you live. For example, I find maintenance and taxes to be lower in the southwest than the southeast. Weather definitely matters.
Market returns and house appreciation will dominate these calculations. If your house is going up 5% and you are leveraged 4:1, you are printing money. House flat while the markets are going tup 10%, the opportunity costs really add up.
What happens to the value my house after I buy only matters for property taxes increases when thinking about the cost of ownership.
As houses age, there can be expensive repairs.
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by jebmke »

LilyFleur wrote: Sun Sep 26, 2021 1:09 pm I don't have a mortgage. So my cost is about 2% right now. That includes an assessment for the aging infrastructure of our condo development. Rent would be more than 4%, but there are no units available for rent. I cannot believe people are paying $570,000 for a two-bedroom condo here, now.
If you had a mortgage and the money currently tied up in the house earned exactly the same rate as the mortgage, your cost would still be 2%, correct?
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by LilyFleur »

jebmke wrote: Sun Sep 26, 2021 1:27 pm
LilyFleur wrote: Sun Sep 26, 2021 1:09 pm I don't have a mortgage. So my cost is about 2% right now. That includes an assessment for the aging infrastructure of our condo development. Rent would be more than 4%, but there are no units available for rent. I cannot believe people are paying $570,000 for a two-bedroom condo here, now.
If you had a mortgage and the money currently tied up in the house earned exactly the same rate as the mortgage, your cost would still be 2%, correct?
I don't know.
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by randomguy »

rockstar wrote: Sun Sep 26, 2021 1:22 pm
randomguy wrote: Sun Sep 26, 2021 1:07 pm
rockstar wrote: Sun Sep 26, 2021 1:01 pm It depends where you live. For example, I find maintenance and taxes to be lower in the southwest than the southeast. Weather definitely matters.
Market returns and house appreciation will dominate these calculations. If your house is going up 5% and you are leveraged 4:1, you are printing money. House flat while the markets are going tup 10%, the opportunity costs really add up.
What happens to the value my house after I buy only matters for property taxes increases when thinking about the cost of ownership.
I disagree. By definition cost of ownership is : money in - money out.
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by rockstar »

LilyFleur wrote: Sun Sep 26, 2021 1:27 pm
rockstar wrote: Sun Sep 26, 2021 1:22 pm
randomguy wrote: Sun Sep 26, 2021 1:07 pm
rockstar wrote: Sun Sep 26, 2021 1:01 pm It depends where you live. For example, I find maintenance and taxes to be lower in the southwest than the southeast. Weather definitely matters.
Market returns and house appreciation will dominate these calculations. If your house is going up 5% and you are leveraged 4:1, you are printing money. House flat while the markets are going tup 10%, the opportunity costs really add up.
What happens to the value my house after I buy only matters for property taxes increases when thinking about the cost of ownership.
As houses age, there can be expensive repairs.
True. And these are pretty dependent on where you live as weather can create more repairs.

Of course, it's reasonable to assume that you'll have replace the HVAC, appliances, and roof, so these all should be in a person's budget. The alternative would be sell and buy new, but after taking into consideration real estate fees, most of these still make sense to do.
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hg064754
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by hg064754 »

frugalecon wrote: Sun Sep 26, 2021 10:40 am Hi HG,

It looks like you are trying to calculate a “net cost,” since you are subtracting things like tax benefit and appreciation from the cost. Shouldn’t you also be including the effective rent that you are paying to yourself for the housing services that you derive from the house?

I am close to paying off the mortgage, at which point the cost of owning my home will be about 2.5% of its value in taxes and maintenance. Based on rentals in my neighborhood, it would cost around 4.5% - 5% of the value to rent something sort of comparable.

Cheers,
FE
The cost I mentioned could be used as the imputed rent to own the home. In your case, your imputed rent is 2.5% of the value of the house per year.
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hg064754
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by hg064754 »

Kagord wrote: Sun Sep 26, 2021 11:05 am IMHO, you need to also put net equity at market value (less gain taxes, if you would have them) at 8% as a cost, as that could be mostly "near term tax-free" invested. Then try to estimate potential future gains in equity as well.
I think that is the same as the opportunity cost I mentioned.

I would not use 8% market return because the stock market is more volatile than the real estate market. But the real estate market is more illiquid than the stock market. We need to account for both volatility/fluctuation and liquidity (ease of converting it to cash and without a huge drop in price.) Overall, I would prefer REITs as a baseline than the SP500. Does REITs have lower return (including dividend) than the SP500? I should know this.
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hg064754
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by hg064754 »

KlangFool wrote: Sun Sep 26, 2021 11:29 am OP,

A) My annual cost of owning the house is ZERO. It is cheaper than renting. Hence, I am either breakeven or make money from buying the house.

KlangFool
What is the compound return on your home price appreciation? You will need to compare that with a similar risk asset. Also account for the illiquidity of your home.

If after doing all that you till get ZERO cost of ownership, then you are golden. You are essentially living in it for free.
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by KlangFool »

hg064754 wrote: Sun Sep 26, 2021 4:28 pm
KlangFool wrote: Sun Sep 26, 2021 11:29 am OP,

A) My annual cost of owning the house is ZERO. It is cheaper than renting. Hence, I am either breakeven or make money from buying the house.

KlangFool
What is the compound return on your home price appreciation?
hg064754,

1) Why should I care? I make money from imputed rent. Aka, ZERO house appreciation is needed

2) It is POINTLESS to think about house appreciation. Only when you sell the house, the price matters. Until then, it costs you more money in property taxes.

KlangFool
Last edited by KlangFool on Sun Sep 26, 2021 4:39 pm, edited 1 time in total.
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by runswithscissors »

Won't speak for the other metrics used to get to 4-6% but I've found that I spend about 1-2% on general upkeep of my homes. Closer to 1% for a new or newer home and 2% for an older home. So if it costs $500k to replace the home today, estimate $5,000-$10,000 a year in general maintenance and upkeep. This is not to improve the home but just keep it in good condition over time.
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by SQRT »

I have 4 personal use places. They range in the 3-5% of market value range for actual annual costs, no mortgages, or other inputed amounts. Depends on type of property (high rise condo is least) and location (lake house is more). It also depends on the overall valuation of the property, ie if it is in a high cost area (all of my places are) the annual actual cost might be less as a percentage of actual value. Also, our Arizona house has a pool so that adds to the maintenance cost. Do you do everything yourself or hire people (we hire people)?

You start with these types of figures then if you want something more complex(like a comparison of owning vs renting), you can include inputed rent, opportunity costs, mortgage interest if you wish. But that didn’t seem to be the OP’s original question.
Last edited by SQRT on Tue Sep 28, 2021 3:07 am, edited 4 times in total.
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by GuyInFL »

runswithscissors wrote: Sun Sep 26, 2021 4:37 pm So if it costs $500k to replace the home today, estimate $5,000-$10,000 a year in general maintenance and upkeep. This is not to improve the home but just keep it in good condition over time.
Wow. My largest expenses are definitely property tax + homeowners insurance. About 1% per year for me.
If you are considering a specific home, I'd put together a list of potential expenses. The large normal ones would be roof, HVAC, Appliances. If these are all old, definitely expect higher expenses, but don't just use an average.
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by eye.surgeon »

hg064754 wrote: Sun Sep 26, 2021 10:34 am I have been thinking about the real cost of home ownership.

(Property taxes + interest on mortgage + maintenance + opportunity cost of the equity + transaction cost, etc.) - (any tax deduction benefit + year-over-year home value appreciation, etc.)

It is about 5% of the value of the house. And this doesn't matter whether you have a mortgage on it or paid off.

Is my estimate way off?

EDIT:
1) The net cost following this calculation is the imputed rent.
2) the opportunity cost of the equity (i.e. the return one could have gotten from investing the equity of the home) must match the risk and illiquidity profile of the home. If the home is levered (i.e. has a mortgage), the risk is high so use higher risk assets e.g. US equity. etc.
As others have mentioned, your estimate is in fact way off because you are comparing the cost of home ownership with the cost of being homeless. I would agree though with your conclusion that owning a home will cost you more than sleeping on a park bench.
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by rich126 »

Cost of a home doesn't really correlate to cost of maintenance. Just because a house goes up in value by $100k doesn't mean your maintenance costsgo up. While some higher priced homes have higher end fixtures and will cost more, many other homes cost or value lies in the school system, acreage or neighborhood which doesn't trigger higher maintenance costs. Things like sq footage, pools, etc. do factor in since flooring will be more money and the roof area will also be larger.
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by snackdog »

There is no rule of thumb. The cost is highly variable and specific to the property, owner, tax regime, maintenance requirements, discretionary expenditures, etc. A $2 million NY estate with five acres of manicured gardens and an olympic pool will have different maintenance to a $2 million LA condo with minimal HOA. Property taxes can vary from near 0% to over 3% of current value. Insurance cost can be vast in a California wildfire area near a major earthquake fault. It can be next to nothing in the midwest.
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by TropikThunder »

hg064754 wrote: Sun Sep 26, 2021 10:34 am
(Property taxes + interest on mortgage + maintenance + opportunity cost of the equity + transaction cost, etc.) - (any tax deduction benefit + year-over-year home value appreciation, etc.)

It is about 5% of the value of the house. And this doesn't matter whether you have a mortgage on it or paid off.
So mortgage interest is part of the equation but the answer is the same with or without a mortgage? Does not compute.
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hg064754
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by hg064754 »

TropikThunder wrote: Sun Sep 26, 2021 10:53 pm
hg064754 wrote: Sun Sep 26, 2021 10:34 am
(Property taxes + interest on mortgage + maintenance + opportunity cost of the equity + transaction cost, etc.) - (any tax deduction benefit + year-over-year home value appreciation, etc.)

It is about 5% of the value of the house. And this doesn't matter whether you have a mortgage on it or paid off.
So mortgage interest is part of the equation but the answer is the same with or without a mortgage? Does not compute.
It is offset by the opportunity cost of the tied up equity
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hg064754
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by hg064754 »

snackdog wrote: Sun Sep 26, 2021 6:27 pm There is no rule of thumb. The cost is highly variable and specific to the property, owner, tax regime, maintenance requirements, discretionary expenditures, etc. A $2 million NY estate with five acres of manicured gardens and an olympic pool will have different maintenance to a $2 million LA condo with minimal HOA. Property taxes can vary from near 0% to over 3% of current value. Insurance cost can be vast in a California wildfire area near a major earthquake fault. It can be next to nothing in the midwest.
Like any rule of thumb, there are extremes and lots of house specific events will affect the cost. This was just an average statement.
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by mr_brightside »

just depends : location, location, location

plus age and other unique factors...

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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by Parkinglotracer »

House in Florida recently purchased (Jul 2020)

Price 345K

without a mortgage the annual carrying expenses without major repairs or maintenance

Property Taxes 5K
Insurance 2K
Elec 2K
Water 2K
HOA .6K
Lawn Cut 1K
Fert/Pest .5K

I’d expect property taxes and insurance to increase this year by 1-2K.
As luck goes house may be worth 400K with recent COVID surge


3-4% seems to fit here
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by CoastLawyer2030 »

rich126 wrote: Sun Sep 26, 2021 4:59 pm Cost of a home doesn't really correlate to cost of maintenance. Just because a house goes up in value by $100k doesn't mean your maintenance costsgo up. While some higher priced homes have higher end fixtures and will cost more, many other homes cost or value lies in the school system, acreage or neighborhood which doesn't trigger higher maintenance costs. Things like sq footage, pools, etc. do factor in since flooring will be more money and the roof area will also be larger.
I somewhat agree with this but also somewhat disagree.

For instance, I live in a pretty upscale neighborhood. When I cut down trees at my old house, which was in a blue collar neighborhood, we just left the stumps and planted hostas in them. Lots of neighbors did this as a cost-saving option. Conversely, at my newer house, we paid to remove the stumps, because not a single house in the neighborhood had decorative stumps.

Similarly, my microwave recently kicked the can. All the appliances were Frigidaire's "Gallery" collection, and in my wife's opinion, anything other than a Gallery was going to look silly in our kitchen. So even though I could have gotten a nice microwave for $200, I spent $430 on this fancy Gallery microwave.

One could argue that I fell for consumerist branding trash, and there's certainly some truth to that. But in my experience, a nicer home in a nicer neighborhood demands more expensive repairs and maintenance than a smaller house in a more modest neighborhood. That's not even mentioning the "you look rich" upcharge you get for every single repair and maintenance issue.
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by IMO »

eye.surgeon wrote: Sun Sep 26, 2021 4:53 pm
hg064754 wrote: Sun Sep 26, 2021 10:34 am I have been thinking about the real cost of home ownership.

(Property taxes + interest on mortgage + maintenance + opportunity cost of the equity + transaction cost, etc.) - (any tax deduction benefit + year-over-year home value appreciation, etc.)

It is about 5% of the value of the house. And this doesn't matter whether you have a mortgage on it or paid off.

Is my estimate way off?

EDIT:
1) The net cost following this calculation is the imputed rent.
2) the opportunity cost of the equity (i.e. the return one could have gotten from investing the equity of the home) must match the risk and illiquidity profile of the home. If the home is levered (i.e. has a mortgage), the risk is high so use higher risk assets e.g. US equity. etc.
As others have mentioned, your estimate is in fact way off because you are comparing the cost of home ownership with the cost of being homeless. I would agree though with your conclusion that owning a home will cost you more than sleeping on a park bench.
OP seems to be ignoring the basic premise that MOST normal people have to pay for someplace to live, perhaps OP is living in parent's basement still?

(Property taxes + interest on mortgage + maintenance + opportunity cost of the equity + transaction cost, etc.) - (any tax deduction benefit + year-over-year home value appreciation, etc.) MINUS imputed rent MINUS opportunity cost on the imputed rent
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by chipperd »

hg064754 wrote: Mon Sep 27, 2021 8:48 am
TropikThunder wrote: Sun Sep 26, 2021 10:53 pm
hg064754 wrote: Sun Sep 26, 2021 10:34 am
(Property taxes + interest on mortgage + maintenance + opportunity cost of the equity + transaction cost, etc.) - (any tax deduction benefit + year-over-year home value appreciation, etc.)

It is about 5% of the value of the house. And this doesn't matter whether you have a mortgage on it or paid off.
So mortgage interest is part of the equation but the answer is the same with or without a mortgage? Does not compute.
It is offset by the opportunity cost of the tied up equity
So the opportunity cost of all potential opportunities is exactly equal to interest on a mortgage? Please show your math on this one.
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by Jags4186 »

Comparing to rent only matters if you would have rented a substantially similar place. Most people buy nicer/more expensive than they rent. Therefore the idea that buying saves you money is likely not true even if your calculator says it is. You need to consider this when you’re calculating your imputed rent.

I lived with my wife in a 1br 600sqft apartment before we bought a 3br 1500sqft house. I would never have rented a 3br 1500sqft house nor would we have bought a 1br apartment.
Last edited by Jags4186 on Mon Sep 27, 2021 12:36 pm, edited 2 times in total.
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by IMO »

CoastLawyer2030 wrote: Mon Sep 27, 2021 9:55 am
rich126 wrote: Sun Sep 26, 2021 4:59 pm Cost of a home doesn't really correlate to cost of maintenance. Just because a house goes up in value by $100k doesn't mean your maintenance costsgo up. While some higher priced homes have higher end fixtures and will cost more, many other homes cost or value lies in the school system, acreage or neighborhood which doesn't trigger higher maintenance costs. Things like sq footage, pools, etc. do factor in since flooring will be more money and the roof area will also be larger.
I somewhat agree with this but also somewhat disagree.

For instance, I live in a pretty upscale neighborhood. When I cut down trees at my old house, which was in a blue collar neighborhood, we just left the stumps and planted hostas in them. Lots of neighbors did this as a cost-saving option. Conversely, at my newer house, we paid to remove the stumps, because not a single house in the neighborhood had decorative stumps.

Similarly, my microwave recently kicked the can. All the appliances were Frigidaire's "Gallery" collection, and in my wife's opinion, anything other than a Gallery was going to look silly in our kitchen. So even though I could have gotten a nice microwave for $200, I spent $430 on this fancy Gallery microwave.

One could argue that I fell for consumerist branding trash, and there's certainly some truth to that. But in my experience, a nicer home in a nicer neighborhood demands more expensive repairs and maintenance than a smaller house in a more modest neighborhood. That's not even mentioning the "you look rich" upcharge you get for every single repair and maintenance issue.
This is the difference in "lifestyle" expense vs. actual maintenance cost increase. Classic "keeping up with the Jones" example. The only tangible increase I see is in property taxes with the change in assessed value. If your in CA, then you actually get a known and limited increase via Prop 13 (not sure if other states have similar?).

There probably is some validity to the "you look rich" upcharge for home services. Although, VHCOLA/HCOLA area vs MCOLA things for various services/repairs are not always much different, in fact, in many VHCOLA areas (say SoCal) there is much more competition from businesses than in lower populated MCOLA areas (from personal experiences).
IMO
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by IMO »

runswithscissors wrote: Sun Sep 26, 2021 4:37 pm Won't speak for the other metrics used to get to 4-6% but I've found that I spend about 1-2% on general upkeep of my homes. Closer to 1% for a new or newer home and 2% for an older home. So if it costs $500k to replace the home today, estimate $5,000-$10,000 a year in general maintenance and upkeep. This is not to improve the home but just keep it in good condition over time.
I've heard using 1-2% can be a good rule, and I've heard 1-2x sq footage cost per year. Those can sometimes overlap well.

I'd love to see you do a separate post on the topic and your specific numbers and what was done to your homes. I have more than 1 home and in those homes, and none in homes of family/friends I know do there numbers come out to that level IF you eliminate and separate upgrades/capital improvements vs. maintenance.
mervinj7
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by mervinj7 »

hg064754 wrote: Sun Sep 26, 2021 10:34 am I have been thinking about the real cost of home ownership.

(Property taxes + interest on mortgage + maintenance + opportunity cost of the equity + transaction cost, etc.) - (any tax deduction benefit + year-over-year home value appreciation, etc.)

It is about 5% of the value of the house. And this doesn't matter whether you have a mortgage on it or paid off.
Also, how are you defining value here? Many of us live in VHCOL areas (e.g Bay Area) where the replacement value of the home is a smaller portion of the total appraised value of the property.

For example, a owning a $2M+ home doesn't cost me $100k/year even if you account for labor costs being much higher here. Note, property taxes here are based on the inflation-adjusted purchase price of the house, not the current value so that helps a lot.
mnnice
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by mnnice »

KlangFool wrote: Sun Sep 26, 2021 11:29 am OP,

A) My annual cost of owning the house is ZERO. It is cheaper than renting. Hence, I am either breakeven or make money from buying the house.

B) The answer to your question is highly dependent on the price that you pay for the house. If you buy the house at a price that it is cheaper than renting, then, the cost is low. If not, the cost is high.

C) What is the market rent of your house?

KlangFool
Having imputed rent less than market rent does not make houses free. If I sold my house and rented the very comparable one across the street I would have more in my taxable accounts which using the 4% rule subsidize a sizable portion of the rent.

If you strung together multiple houses sitting gigs or lived in mom’s basement and skipped either buying or renting altogether that would be closer to free but probably would have it’s own costs.
TropikThunder
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by TropikThunder »

Parkinglotracer wrote: Mon Sep 27, 2021 9:29 am House in Florida recently purchased (Jul 2020)

Price 345K

without a mortgage the annual carrying expenses without major repairs or maintenance

Property Taxes 5K
Insurance 2K
Elec 2K
Water 2K
HOA .6K
Lawn Cut 1K
Fert/Pest .5K

I’d expect property taxes and insurance to increase this year by 1-2K.
As luck goes house may be worth 400K with recent COVID surge


3-4% seems to fit here
You can’t include utilities since you’d have to pay them wherever you lived. Unless that’s Mom’s basement of course.
IMO
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by IMO »

Jags4186 wrote: Mon Sep 27, 2021 12:34 pm Comparing to rent only matters if you would have rented a substantially similar place. Most people buy nicer/more expensive than they rent. Therefore the idea that buying saves you money is likely not true even if your calculator says it is. You need to consider this when you’re calculating your imputed rent.

I lived with my wife in a 1br 600sqft apartment before we bought a 3br 1500sqft house. I would never have rented a 3br 1500sqft house nor would we have bought a 1br apartment.
I don't really get the logic, I kinda get it, but kinda don't. You are now living in a 3 br/1500 sq ft house and not in a 600 sq ft apartment anymore. Shouldn't you be required to calculate the imputed rent cost of what your actually living in? When I look at the annual cost of owning a car, it's to own my car that I own now, not in the car I drove in college? When I look at renting a car, I have to look at the actual cost of the car I want to rent/use (say an full sized SUV) vs. the least expensive option (say a sub-compact car), or if I fly 1st class vs. economy. Seems more like comparing how much the lifestyle choice cost's one?
LFKB
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by LFKB »

The answer depends on where you live, value of home, property tax rate, etc

For me, it's about 2.8%

1.625% interest only mortgage
+ 1.15% property taxes
+ 0.25% insurance and maintenance
- 0.22% tax savings
EnjoyIt
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by EnjoyIt »

frugalecon wrote: Sun Sep 26, 2021 10:40 am Hi HG,

It looks like you are trying to calculate a “net cost,” since you are subtracting things like tax benefit and appreciation from the cost. Shouldn’t you also be including the effective rent that you are paying to yourself for the housing services that you derive from the house?

I am close to paying off the mortgage, at which point the cost of owning my home will be about 2.5% of its value in taxes and maintenance. Based on rentals in my neighborhood, it would cost around 4.5% - 5% of the value to rent something sort of comparable.

Cheers,
FE
2.5% return on the equity in your home. Better than bonds but worse than equities if that equity was placed elsewhere.

Our home is similar, definitely not the best investment, but we have to live somewhere and like to be debt free in retirement.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
KlangFool
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by KlangFool »

mnnice wrote: Mon Sep 27, 2021 1:12 pm
Having imputed rent less than market rent does not make houses free. If I sold my house and rented the very comparable one across the street I would have more in my taxable accounts which using the 4% rule subsidize a sizable portion of the rent.
mnnice,

1) Only if your house appreciate enough and the market rent stays low. But, if the market rent is higher, then, even the 4% rule is not sufficient to subsidize the rent.

2) Or else, the imputed rent is saving money from market rent and putting more money into your portfolio.

For example,

A) Person A bought a house at 375K with 20% down payment, the PITI with 30 years fixed rate 300K mortgage = $1,800 per month.

B) The house appreciates to 540K and the market rent went up to $2,600 per month.

The comparison

1) Stay at the house, imputed rent saving of 9.6K per year with the opportunity cost of about 75K of down payment.

2) Sell the house and gain 165K but pay 31.2K of rent per year. Aka, $9,600 more than PITI per year.

3) Please explain why selling the house helps?

KlangFool
Last edited by KlangFool on Mon Sep 27, 2021 1:48 pm, edited 1 time in total.
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MathWizard
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by MathWizard »

My house does fall into that range at 4.6%

0.375% insurance
1.75% property taxes
2.5% maintenance (may be a bit high. I've spent a lot fixing up the place, so no major improvements, just maintain)

You did not include utilities.

However, you have to live somewhere.
The house is about 8% of my current net worth, so
4.6% of 8% is about 0.37% of my NW.
If I include utilities, I am at 0.38% of my NW, and
I am out of the elements, warm and dry, and have
phone, internet, electricity, water sewer and streaming services.
Jags4186
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by Jags4186 »

IMO wrote: Mon Sep 27, 2021 1:16 pm
Jags4186 wrote: Mon Sep 27, 2021 12:34 pm Comparing to rent only matters if you would have rented a substantially similar place. Most people buy nicer/more expensive than they rent. Therefore the idea that buying saves you money is likely not true even if your calculator says it is. You need to consider this when you’re calculating your imputed rent.

I lived with my wife in a 1br 600sqft apartment before we bought a 3br 1500sqft house. I would never have rented a 3br 1500sqft house nor would we have bought a 1br apartment.
I don't really get the logic, I kinda get it, but kinda don't. You are now living in a 3 br/1500 sq ft house and not in a 600 sq ft apartment anymore. Shouldn't you be required to calculate the imputed rent cost of what your actually living in? When I look at the annual cost of owning a car, it's to own my car that I own now, not in the car I drove in college? When I look at renting a car, I have to look at the actual cost of the car I want to rent/use (say an full sized SUV) vs. the least expensive option (say a sub-compact car), or if I fly 1st class vs. economy. Seems more like comparing how much the lifestyle choice cost's one?
You're not required to do anything. Folks twist themselves into all sorts of shapes trying to justify their positions. :D

Renting offers an intangible benefit of being easily and inexpensively changed. If a couple living together in a 1BR apartment gets pregnant, that can, for essentially the cost of a mover, switch to a 2br apartment. If a family of 4 lives in a 3br apartment and one child moves out, you can again, relatively easily move to a smaller apartment for essentially no cost.

However, because of the high transaction costs and time involved buying real estate, it doesn't make much sense to buy only what you need right now, you need to buy what you need 7 years from now which may be different than what you need 15 years from now. So you end up buying with future expectations baked in.

I guess my point is, the imputed rent sounds nice, but it doesn't reflect a true offset to your otherwise would have been there expenses.
stocknoob4111
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by stocknoob4111 »

You have $500,000 of free capital gains every 2 years, that is an insane tax break to have
skis4hire
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by skis4hire »

(Property taxes + interest on mortgage + maintenance + opportunity cost of the equity + transaction cost, etc.) - (any tax deduction benefit + year-over-year home value appreciation + imputed rent + rent opportunity cost).

At 70% LTV, our cost is about 0.5% assuming zero appreciation. In reality we're seeing about 2%/year so our cost is negative 1.5% currently. Plus due to SALT limits our tax deduction benefit is near zero, which could change for the better. How do you amortize 1-time costs? I chose 10 years for transaction costs, I would probably do the same for 1-time events like roof replacement and it wouldn't change the numbers very much, about 0.5%.
mnnice
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Re: Annual cost of owning a home is 4% to 6% of the value of the house.

Post by mnnice »

KlangFool wrote: Mon Sep 27, 2021 1:44 pm
mnnice wrote: Mon Sep 27, 2021 1:12 pm
Having imputed rent less than market rent does not make houses free. If I sold my house and rented the very comparable one across the street I would have more in my taxable accounts which using the 4% rule subsidize a sizable portion of the rent.
mnnice,

1) Only if your house appreciate enough and the market rent stays low. But, if the market rent is higher, then, even the 4% rule is not sufficient to subsidize the rent.

2) Or else, the imputed rent is saving money from market rent and putting more money into your portfolio.

For example,

A) Person A bought a house at 375K with 20% down payment, the PITI with 30 years fixed rate 300K mortgage = $1,800 per month.

B) The house appreciates to 540K and the market rent went up to $2,600 per month.

The comparison

1) Stay at the house, imputed rent saving of 9.6K per year with the opportunity cost of about 75K of down payment.

2) Sell the house and gain 165K but pay 31.2K of rent per year. Aka, $9,600 more than PITI per year.

3) Please explain why selling the house helps?

KlangFool
I actually never said selling the house helps or hurts for that matter. I am calling you on your statement that housing is free. Your housing, my housing, everyone’s is not free either way.

When we bought our house we sold ~147 shares of AAPL to buy it. It would cost about ~1300 now. Unfortunately, 147 shares of AAPL would now be ~3500 shares. Pretty sure I could pay any capital gains and the rent no problem with the difference. But that’s a cherry picked but more or less true example.

Selling our house now and renting it’s fraternal twin across would be pretty close to a wash. The rent is $1200. My hypothetical 4% of proceeds is $625 a month. Not paying property taxes and having renter’s not homeowners insurance would be another $300. That’s $275 for the privilege of not having to fix stuff or having the hassle of selling it seems not a that burdensome. I would have seriously considered it if has been available when we we bought our house.
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