How to calculate the return on investment on your primary residence? I have a pet peeve when others talk about their real estate in this real estate crazy city called Vancouver. Even I am guilty of it sometime, thinking that increase in property value is something to write home about. Especially when Vancouver has become Canada’s first city of millionaires, where the average net worth in 2015 was $1.036 million. My pet peeve is when people don’t calculate the return or profit on their home sale accurately. When they overestimate the return on investment on the primary residence.
It irks me when someone says: I bought this house in 1992 for only $250,000, now in 2018, it’s $1,250,000. I made $1 million!
One has to brush aside the glitz and glam and crunch numbers to determine the real number. In order to accurate calculate how much you’ve really made, technically there are a number of other costs that should be calculated into that value, and it would be prudent to compare this number to a benchmark stock index.
Let’s take for example a house bought for $270,000 with a $190,000 mortgage on a 25 year amortization schedule and a 2.84% mortgage rate, 5 years ago. Let’s say you sold the house for $500,000 this year. At first, when you calculate it hastily, it sounds like you made $230,000, but if you look closely it’s much less than this.
I would recommend you sit down, maybe grab a glass of wine, because this is kind of painful and will bring your beer goggled real estate ‘gains’ vision back down to reality to the cost of owning.
Table of Contents
To Calculate the Return on Investment on Your Primary Residence:
Here are the other numbers you need to calculate the ROI on your primary residence.
mortgage interest and mortgage penalty costs
If you have a mortgage, you pay mortgage interest to the bank for borrowing their money. It can be a lot of interest that you aren’t aware of because of the amortization schedule. For example, on a $190,000 mortgage with a rate of 2.84% on a 25 year amortization schedule, the interest cost is about $5400 for year one. In year two, it is $5200, year three $5000, year four, $4850 and so on.
The total amount of mortgage interest paid after five years is about $28,500. That’s a lot right?! Already it feels like the ‘gain’ from the home sale isn’t that much!
This number has to be deducted from your selling cost in order to reflect the cost of borrowing for your home.
If your mortgage is even higher than this (and many in Vancouver are much much higher than this, I have a friend with a $1 million mortgage), your interest costs are even higher, obviously!
In addition, if you have a closed mortgage, you will have to factor in the mortgage penalty costs if you were to pay off your mortgage balance early. Usually the mortgage penalty is about 3 months of interest, Rate Hub has a mortgage penalty calculator.
Home insurance costs are another factor.
maintenance, assessment, or renovation costs
If you live in a condo you pay maintenance fees you should calculate how much you’ve paid over the years. If you paid any sort of special assessment for your strata you should also include this too.
If you live in a house or a condo and you upgraded the appliances and spent $3250 upgrading the kitchen appliances and $3600 updating the bathroom, you should put this in your calculation. Let’s say you had to repair the roof for $13,800 too three years ago.
Already, that’s another $20650 taken off the top.
property taxes
If you are home owner, you pay property taxes. People who rent don’t have to pay property taxes. Property taxes go ‘poof’ unfortunately. Let’s say for the past five years, your property taxes were about $500 a year. Over five years, that’s $2500.
There goes another $2500 for property taxes.
Here’s how to pay your property taxes with a credit card to lessen the sting.
real estate sale costs
Real estate costs are a b*tch unfortunately. In British Columbia, on the first $100,000 it is 7% commission split between the buying and selling real estate agent, and 2.5% split between the buying and selling agent on the remaining balance. Plus 5% GST. So on a $500,000 house, the total commission amount is $17,850.
Of course, if you use discount real estate brokerages or negotiate with your realtor, you may be able to bring this down. For example, discount realtor brokerage One Percent Realty may lessen the selling realtor fee but possibly not the buying realtor fee unfortunately.
It’s painful I know, but now we must subtract $17,850 from the $500,000 sale price.
opening and closing costs
Notary or lawyer fees vary but can be about $2000 for closing costs.
Don’t forget about the opening costs when you bought the house five years ago, let’s put in another $2000.
The hemorrhaging of ‘profits’ is slowing down, and we subtract another $4000 from the sale price.
Here are some of the closing costs when selling a home in BC.
capital gains taxes (if any)
In Canada, on your primary residence, you don’t have to pay any capital gains taxes or taxes on the sale of your home (which might get me on a huge rant of why the speculators are flipping properties in Vancouver and making it so unaffordable, but let’s not get started, shall we?). If it is not your primary residence you will have to pay taxes.
What’s the total?
Adding all of these numbers up, you get almost $74,000.
$500,000 – $190,000= $230,000 (the number that most people think is the return on investment)
$230,000- $74,000= $156,000 over 5 years on a $80,000 investment (the down payment).
Using this return on investment calculator by Calculator.net, the annualized return on ‘investment’ was 14.29% over 5 years.
Finally You Compare This Number to a Benchmark Index
Compare the number above to the S&P500 the 5 year annualized returns from the last five years which was 13.46%.
So if you were to rent and have $80,000 to invest or to plunk down into a down payment, you would come out similarly as putting your money down into a home. However, there are lots of variables and assumptions to this. Of course if you have $80,000 to invest in the market that means you also have money to pay for rent too. In addition there are variables to this calculation and this is a rough guideline. For example, if you have HIGHER mortgage debt that means higher mortgage interest costs even if you have secured the same ‘great’ rate of 2.84%– for example a $570,000 mortgage is about $15000 for the first five years using the calculator. And it depends on when in the real estate cycle you are. Also depends when in the stock market cycle you are.
In addition, one could argue that the amount of mortgage interest paid to live in your own home is like paying ‘rent’.
It really depends on whether your home is considered an ‘investment’ but personally I would be wary of calling it this because of the impending real estate crash in Canada.
It will come, eventually (right?).
For real estate crowdfunding idea in Canada, click here.
How do you calculate the return on investment on your primary residence?
GYM is a 30 something millennial interested in achieving financial freedom through disciplined saving, dividend and ETF investing, and living a minimalist lifestyle. Before you go, check out my recommendations page of financial tools I use to save and invest money. Don’t forget to subscribe for blog updates, a free dividend yield spreadsheet, and the free Young Money Bootcamp eCourse.
I never would of thought that a city the size of Vancouver would have an average household net worth of greater than a million. That is mind boggling. I guess it’s mostly home equity from what you are saying??
Increasing home values beat the alternative for sure. But unless you sell and then relocate to a lower cost market, it’s hard to realize the return in a meaningful way other than bragging rights. Sounds like there is plenty of that.
I just can’t wrap my head around some of these crazy real estate markets.
@Tom- Yup, it is mind boggling. Yes, it is mostly home equity, yes and there is SO much bragging rights/ bragging going around. I recently bumped into a high school acquaintance, and one of the first few questions she asked was “where do you live?” followed by a “we bought a house on Main street a few years ago, I’m so glad we got into the market”.
Great post! Toronto’s real estate market has become the new Vancouver and everyone is buying up property like crazy and pushing up the home values. In 2 years of owning my house it appreciated by $600,000 which is awesome but it’s costing me a lot to maintain it. Haven’t done the exact calculation but I suspect it’s a lot!
@Janet- Yes, I heard it’s crazy over in Toronto recently- though I think the speculation tax might have helped calm things down a bit? It would be interesting to see the calculation compared to the S&P500 🙂 The real estate market is so unpredictable.
Great breakdown on how much your ROI really is instead of the lazy way of calculating it based off how much you bought it for and the current value of the property.
Vancouver and the SF Bay Area are very similar with their overvalued home prices. It’s so high here right now that a home that was burned down was sold for close to a million dollars a couple weeks ago. Basically the buyer bought the land because the home itself is not salvageable. The price was based on a combination of low inventory of homes on the market, close proximity to the Silicon Valley and of course the home values that were sold in the neighborhood.
@Kris- Yeah, most people calculate it like the ‘lazy way’ including my friends in real life. But then I don’t want to correct them because then I’ll sound like a b*tch hah. Wow, a home that was burnt down sold for a million dollars? That’s crazy. SF has the money though to support the housing prices, people are compensated better than in Vancouver (e.g. software engineers in tech). The average median wage here is low but yet the houses are millions of dollars.
Nice breakdown GYM,
I have lived in my principal residence for over 20 years with no plans on selling anytime soon so it makes little difference to me. But a slow down in real estate might have started, Overall sales fell 27% from last year in the lower mainland. With all the new government taxes and regulations the new BC Premier (Horgan) might get his wish and slow the market.
@Steve- Yes, you’re right- only relevant if you plan on selling it. It would be interesting to see how Horgan slows the market. Also, later this year Gregor Robertson (in Vancouver) will be leaving so maybe someone new will be less corrupt with the developers.
Hey GYM!
Wow, you are quite the Ms. Debbie Downer! lol. I had coffee, not wine, to get through those numbers (wine would have gone better).
I know I always say we “flipped” our home, and “sold it for 100K more than we bought it!” sounds so much more click baity and appealing than…”annnnd we dumped about 40K into it if you run it through the analysis sooooo….there’s that elephant”
It would have been a smart move for us go to a lower cost of living area, nope, but moved to a higher cost of living area. Hoping to stay long enough to where the market turns in our favor, and we won’t have to improve our home so much…just maybe paint. paaaaaaiiiiiint. and a little landscaping here and there to keep up the appearance. I’m sure our appliances are going to start going out one, by one, though…doh!
Have a great rest of your week!
@Mrs. DS- Hah, sorry to burst everyone’s bubble! Ppppaiiint does wonders to a home’s resale value. Your appliances and home (from your cleaning post) look immaculate so I am sure you will flip it for another $100K 🙂
Great points! My wife and I were in the housing market because we thought that’s what we were supposed to do at this stage in our life. Get good jobs, get married, get a house, right? Well, we live in NYC and even looking in the surrounding areas outside of the city, prices and taxes are all very high. Maintenance costs on condos are very high all-in as well.
When we broke it down, the cost of the interest, monthly taxes, maintenance, and other costs such as the ones you outlined end up coming out just as high as rent, and that’s not including the principal on the mortgage! While the value of the home can go up over time, I think we are in a bubble that will have to correct. Also, we may want to move in a few years once a child comes into the picture, and in our calculations, it makes even less sense incurring these costs if we could possibly be moving in 5 years or less.
@Jay- Thanks for visiting. Good for you for calculating the future costs and what it might look like in 5 years or less if you move out of the home and sell it. Not many people have the foresight to run the calculations before they say ‘buy’- buying a home tends to be a very emotional purchase.
Excellent breakdown! I would say you have to consider the trade off costs of renting, because unless you’re living for free with your parents, you’d be paying money to live somewhere regardless 😉 The Seattle area has had a heck of a run with real estate as well, with rental prices climbing at a breakneck pace as well. Because we have a fixed rate loan, we’ve locked in our total monthly home cost, whereas if we had been renting, our costs would have close to doubled in 7 years. Insane.
@Angela- That’s very true! It would be interesting to run the numbers with that factored in as well. Are there no laws in Seattle to protect renters from doubling rental costs? In Vancouver, you can only increase rent by about inflation cost, like 2-3% per year.
Seriously you are amazing. And I would say 2.84% is a great interest rate. I mean a lot of people have much more than that in interest. Our mortgage is 3.75%. I think closing costs are ridiculous too. If our house was not an Airbnb then we would probably rent or downgrade to a much smaller place. I think real estate leveraged and timed well makes sense sometimes but that’s not the case here nor there in Vancouver.
The only market I know better than Seattle is SF, Toronto and Vancouver because my friends are settled in those two cities and I ask for info.
@Lily- Oh, it’s 2.84% over 5 years! I think in the US your mortgage rates are higher (in your case 3.75%) but the terms are longer- like 20+ years? One of my pet peeves is realtors closing costs. They make so much bank it’s ridiculous. Show a home here or there and put up a listing and BOOM $15,000+ (for their side of the commission) on a $800K property. I’ll stop there or else I’ll start ranting haha.
Love this post! It’s the same as how people on a diet, underestimate the calories they are eating (only in reverse of course).
I wish they would get rid of the mortgage interest rate deduction altogether. As I age, I’m starting to factor in my own time (more seriously) into all of my investments too. Thanks for the reminder and eye-opening post.
@Jim- Thanks Jim! Yes, but I’ve never been one to calorie count (I ate half a chocolate bar yesterday, oops!). That’s a good point- to factor time into your investments- time is so important and something that we only have a limited amount of (24 hours in a day).
Hey GYM!
The stuff you say in this post is SO SO true! I’ve had so many arguments with my parents about this and ’til this day, they still call me a dummy…… Everything I say to them goes in one ear and out the other! And every time I visit them, they would tell me all about their friends’ or coworkers’ successful stories of how much money they’ve made on real estate (including their primary residence from over 20 years ago), but never they never include the costs. I would bring up interest costs, maintenance such as huge repairs, property taxes, and their response is “so what? that’s normal costs that everyone has to live with…that doesn’t count. Renting is not the way to go.”
I even talked about the time it takes to maintain the lawn, shovel the snow, etc. These are costly in terms of our time (at least I think so). It feels like I don’t have time for that anymore, but luckily my fiance does most of that now – ha! Even he’s starting to get annoyed with the work. He definitely doesn’t look forward maintaining the home over the weekends, lol!
Oh yeah, btw… my parents think I’m a failure because I didn’t catch RE during the “right time” and never made a fortune from it. I decided to put my money in stocks and funds, and they tell me how pathetic I am. 🙁
But posts like these make me feel better. Thanks for a great post as usual 🙂
@fin$avvypanda- Oh man I’m so sorry that your parents say things like that to you!! You have done so well and they don’t even realize it. I think the Boomer immigrant generation (speaking from my own experience) are more leery of the stock market in general and tend to view real estate as a safe haven for cash. So don’t’ take it personally (though probably hard not to since it is your parents talking) girl, keep on trekking the good trek!
All comparisons of dollar values over time must first be converted to “today’s dollars”. In the example you give, $250,000 in 1992 is the equivalent of $393,500 in 2018 dollars…Poof!…there goes another $143,500 of so called profit.
@Garth- Ah, yes that’s right! Thanks for pointing that out.
The numbers seem to be correct except for the property taxes. I would estimate property taxes from 3500.00 to 7000.00 plus – per year – living in some municipalities in Ontario. And that is on a property in the 600,000 range. People in Toronto have less property taxes than someone in Hamilton.
@RJ- Yes, definitely depends on how big your primary residence is. Mine is very small right now (and am in a condo) but it’s $500 a year. I can imagine property taxes to be even more as the lot gets bigger (and if it is a new build). My aunt lives on a large lot and renovated her home (I think there are 10 bedrooms in there, it’s quite large) and her property taxes are somewhere around $25,000 a year.
I always knew the true gain wouldn’t be much after we sold our previous place, it just seemed like a lot on the surface because we had done a good job bringing down the principal with prepayments and did next to no maintenance to offset our super high HOA fees ($400 a month!)
So I didn’t look at the sale of our place as profit, just an exchange of equity for cash.
@Revanche- That’s a good way to look at it 🙂 I made this mistake with my old place (didn’t factor in mortgage interest) that I sold a few years ago- I probably didn’t have as much profit as I thought I did!
Great article, I can’t get my head around the net worth or the residents of Vancouver. I am a real estate agent and agree with you about the transactions costs to buy and sell. The transactions costs are high.
Oh wow a very detailed article on calculating a property ROI. I’m not from Vancouver but i would like to start investing in real estate and articles like these really helps a lot in improving my knowledge about it. Would love to take one of your ecourses!
@Erika Ann- Thanks for reading! Would love for you to take an ecourse but I don’t talk about real estate in them though! 🙂
Very useful information for me. Thanks a lot for it! btw, do you think that there is any sense in investing money in Pakistani real estate market? Are you familiar with it? Thanks for your advice!
@Phase 9- I am not familiar with the Pakistani real estate market 🙂
Just wondering – in the example above, is the amount of investment actually $80,000 PLUS the value of payments towards the principal over 5 years, instead of just $80,000? Isn’t the owner just spreading their cash outlay over time, with the effect that they are investing more than the initial downpayment, thereby reducing the ROI?
@ep5716- Thanks for visiting! Yes, in the example above, $80,000 down payment plus the value of payments towards the principal (which includes the mortgage interest from the amortization schedule). I would say that the payments towards principal goes toward the home equity, which decreases the principal and increases the home equity once you sell it. Kind of complicated, probably flawed in calculations and you’re likely right about it further reducing the ROI.
Thanks for getting back to me and confirming. Good to know!
Thank you so much for valuable information about the return on investment in real estate
@Darshan- You’re welcome 🙂
Very informative, however, bottom line we have to live somewhere even in our RV if worse comes to worst. But not for free for sure.
Renters are not happy. Owners are not happy either as well as homeless people aren’t they? We have to pay for a shelter no matter what. Just a fact of life, we have to pay for our food and clothes.
I paid for my house in 5 years, live a frugal life, content and I’m very grateful to my simple way of living which is debt free.
@Ayari- Good for you to pay off your mortgage in 5 years and be debt free- that’s a very freeing feeling, I’m sure.