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I think many, if not most people calculate the return on their home as an investment as this CNN/Money calculator does. After seeing this, I whipped up a theoretical infographic illustrating how the use of leverage in a home purchase factors in to your return. It’s super simplistic, not factoring in opportunity cost, use and enjoyment, tax deductions, improvements and other factors because I wanted to show the power of leverage.
Forget about price indices like Case Shiller or similar. I can’t tell you how many times I have seen a home price index paired up against a stock price index as a way to determine which investment is better. Apples and oranges.
Measure your ROI using what you invested (down payment) and what your home equity expanded (or contracted) to.
The CNN/Money rate of return calculator is really only a measurement of home price appreciation compared to the same period for stocks and bonds as an opportunity cost – comparing different asset types side by side – yet that’s not how the majority of homebuyers interact with their home as an investment.
It’s most often about leverage.
An appraisal colleague and friend of mine pointed out that in my original version, I incorrectly used the word “profit” within the infographic rather than what I was actually talking about: “equity” ie return on investment (ROI) – how much the original down payment gained over time. The numbers all remained unchanged.
Tags: Case-Shiller, CNN/Money, Affordability, leverage, Calculator, ROI, opportunity cost, home equity