Real Estate
Computing the Investment Return of a Home is Complex
Computing the investment return on a stock or bond is usually fairly straightforward. Computing the investment return of a home, on the hand, is far more complex. A variety of statistics must be considered in order to estimate the investment return of a home correctly.
The size of new homes has increased over time, and that effect contributes to their rising prices. Quality improvements also tend to drive up prices. The owner of a specific home does not benefit from size or quality trends without incurring costs to add on or upgrade. In many cases a house will lose value on an inflation-adjusted basis as it ages. Increasing land values often cause appreciation of a piece of property, but land and structure values are not stated separately.
A home provides part of its return by sheltering its owner and giving thereby an "effective income." A rough way to quantify that income is to determine the cost of rent that the owner avoids.
Expenses of owning a home reduce its net return. Mortgage interest, property taxes, insurance, utilities, and maintenance are major costs that impact the investment return of a home.
Using all aspects of home ownership in a computation of its financial return is complex and rarely done.