Owning a Home: Calculating the Real Costs and Returns

According to the Federal Reserve Bank of New York's 2024 Survey of Consumer Expectations, homeowners' one-year-ahead home price growth expectations increased to 5.1%, the second-highest reading in the survey’s history. While this indicates strong confidence in home price appreciation, it may overlook factors such as taxes, maintenance costs, transaction fees, and the opportunity cost of capital tied up in homeownership.

This article walks through how to evaluate a home like an investment—by calculating net equity growth, factoring in maintenance and tax impacts, and comparing that return to alternatives like market exposure.

Key Takeaways

Home appreciation alone doesn’t determine returns—costs, taxes, and equity growth matter just as much.
Maintenance and property taxes can significantly erode long-term gains.
Tax benefits are limited by income and deduction rules, not always fully realized.
Down payment and ownership costs carry opportunity cost—capital that could be earned elsewhere.
A structured return framework can help evaluate whether homeownership supports or slows overall portfolio growth.

Appreciation ≠ Return

It’s common to hear that a home “appreciated 5% this year.” But return on investment depends on more than market value.

Hypothetical Example: A $500,000 home grows to $525,000 (a 5% gain). But the buyer paid:

$15,000 in mortgage interest
$6,000 in property taxes
$4,000 in maintenance
$3,000 in insurance
$30,000 in closing costs and commissions (on eventual sale)

Even with $25,000 in appreciation, that return shrinks when costs are included.

So what? Evaluating return without expenses is like measuring portfolio growth before fees and taxes—it doesn’t reflect actual investor outcomes.

Understanding Equity Growth Over Time

Many homeowners don’t fully own their homes—they own equity, which builds gradually, especially in the early years of a mortgage. At a 6.91% interest rate, roughly 87% of a 30-year fixed mortgage payment goes toward interest in the first year.

Hypothetical Example: A buyer puts $100,000 down on a $500,000 home. After five years of payments, 3% annual appreciation, and accounting for upkeep and selling costs, their net equity may have grown by only ~$50,000—not the ~$125,000 can often be expected."

Why this matters: Most “gains” during short-term ownership come from principal paydown, not appreciation—and that paydown is front-loaded with interest.

Taxes Can Help—or Hurt

Mortgage interest and property tax deductions are widely discussed, but their actual value depends on tax status:

Only homeowners who itemize deductions benefit from these write-offs.
After the 2017 Tax Cuts and Jobs Act, the standard deduction rose sharply—making itemization less common.
The $10,000 SALT deduction cap also limits high-tax state benefits.

Capital gains exclusion on primary residences is real—up to $250k (single) or $500k (married) if you’ve lived in the home for two of the last five years—but it’s only realized on sale.

Bottom line: Tax benefits exist, but are often less than advertised—and shouldn’t drive the investment decision alone.

Opportunity Cost—What Could the Capital Have Done?

Every dollar spent on a down payment, closing costs, and maintenance is capital that could have been invested elsewhere.

Hypothetical: Imagine $150,000 in home-related capital. If invested in a balanced portfolio returning 6% annually, it would grow to ~$201,000 in five years.

If the home’s net gain over that period is $50,000 after costs, the difference in outcomes becomes clear.

This is not to say renting and investing is always better—but the opportunity cost of capital must be considered in any full-return calculation.

Building Your Own Ownership Return Calculator

To evaluate a home as an investment, investors can use a structured framework:

Step 1: Estimate Net Gain

Final sale price minus purchase price
Subtract closing costs, fees, and major capital expenses

Step 2: Add Principal Paid Down

Total equity accumulated via mortgage payments

Step 3: Subtract Ownership Costs

Interest, taxes, insurance, HOA, and maintenance over the period

Step 4: Compare to Alternative Investment

Estimate what the same capital would’ve earned in a portfolio, using a reasonable assumption (e.g., 5–7% per year)

This approach frames the question not as “did the house go up?” but “was this the best use of capital over this time frame?”

A simple tactic worth remembering: Tracking total ownership costs—including time, taxes, and opportunity cost—can offer a clearer picture than home price alone. In investing, net outcomes—not surface numbers—build real wealth.

Homeownership Returns FAQs

What structured framework can help estimate the return on homeownership?

Calculate net gain after sale and costs, add principal paid down, subtract ownership expenses, and then compare with estimated returns from alternative investments.

Why may tax benefits from owning a home be smaller than many expect?

With more taxpayers using the standard deduction and the state and local tax cap in place, the value of itemized mortgage and property tax deductions is often limited.

What appreciation rate was assumed in the five-year ownership illustration?

The example used a 3% annual home price appreciation assumption to project potential equity outcomes.

Why is relying solely on appreciation an incomplete way to evaluate renting versus owning?

Because factors such as taxes, maintenance, insurance, and the opportunity cost of capital significantly affect net returns.

How does the relative illiquidity of homeownership affect investment comparisons?

Capital tied up in down payments and upkeep is less flexible and cannot compound elsewhere until released by selling or refinancing.

What is one way to more accurately measure the financial outcome of owning a home?

Track total ownership costs—including interest, taxes, maintenance, and opportunity cost—rather than relying solely on changes in property value.

Why do many short-term homeowners see most equity gains from loan repayment rather than appreciation?

Because early mortgage payments are heavily weighted toward interest, so principal reduction—not market value increases—accounts for much of the equity growth.

How do ownership costs affect returns compared with portfolio fees?

Just as fees reduce portfolio returns, expenses like property taxes, insurance, maintenance, and transaction charges can diminish realized returns from homeownership.