get asked all the time math would suggest a potential
about housing as an 10% return in one year (a $50,000
investment, and as I talk profit on a $500,000 purchase).
with people it is amazing how This, while straightforward, is
differently people look at it. not an accurate calculation for
Forget investment property for several reasons.
the moment and consider how we
should evaluate the investment First, it is critical to factor
performance of our own homes. I in transaction costs on the sale
am surprised how many people of your home and deduct them from
don’t know the difference between the gross sales price to see how
“enterprise value”, which is the much of the sales price you have
sales price of a home (debt plus left. These include what it might
equity), and “equity value”, cost you to prepare the house for
which is what is left at the end sale (painting, landscaping,
of the day when you sell your staging in some cases, etc.), as
home and pay off the mortgage. In well as real estate commissions
determining whether this was a and other transaction related
good investment for you, it is costs.
only the latter calculation that
matters. Let’s say in our hypothetical
example our seller would invest
Most people simply look at how $10,000 in sprucing the place up
much the value of their home has for sale, and the real estate
appreciated since they bought it, commission plus other closing
and compare it to what they paid. costs on the hypothetical
Let’s say someone bought a home $550,000 sale might be another
for $500,000 a year earlier and $33,000 (say 6% of the sales
their neighbor’s identical home price). Thus that $550,000 sales
just sold for $550,000. Simple price results in only $507,000
after these transaction-related seller’s return on their $25,000
costs, implying a mere 1.4% of equity investment from the 28%
return ($7,000 profit on a we just calculated to an
$500,000 purchase price), right? astonishing 50% ($12,500 profit
Wrong again. on the $25,000 investment).
To calculate your investment A couple of basic takeaways from
return you need to compare your this: First, make sure to factor
profit (or loss) to the equity in all costs of a transaction.
you have invested, not the entire Second, understand the difference
home price. Let’s say you put 5% between the aggregate home value
down to buy the home, which and the equity you have invested
equated to $25,000. Your $7,000 in the home, which is what
profit in this case actually impacts your true economic
represents a very attractive 28% return. Third, appreciate the
return on your investment in only impact sales-related costs can
one year. have on your return. While a
$5,000 commission difference
One way smart homeowners can seems relatively insignificant in
increase their returns is to the context of a $550,000 home
appreciate how much the return on sale, it is VERY significant in
their invested equity can be relation to the equity investment
enhanced by saving say 1% in the in your home, which is the basis
agent’s listing commission. In of determining your return on
the example above, a 5% sales your investment.
commission vs. 6% would have
increased our hypothetical
About the Author:
Gary Beasley writes for ZipRealty. ZipRealty provides home buyers and sellers with an innovative solution. ZipRealty has streamlined the real estate process and is able to pass significant savings to its clients.
