Imputed income (rent) Owner occupied houses.

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Professor Emeritus
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Imputed income (rent) Owner occupied houses.

Post by Professor Emeritus »

Imputed income is an extremely well known economic concept
http://en.wikipedia.org/wiki/Imputed_income
http://www.bea.gov/faq/?faq_id=488
http://www.clearonmoney.com/dw/doku.php ... puted_rent

I am simply fascinated that Bogleheads who analyze investment portfolios to multiple decimal places do not analyze their imputed income and its related housing expenses.
Most studies use an average of 5 percent of the capital value of a home as the imputed income.
I had a relative who lived in an $800.000 house with a 40,000 a year pension.
She simply could not understand that she really had an "income" of 80k and was in effect "spending" half of it on housing.
(yes I know you have to include selling costs, so the capital value of a house is after cost of sale)

NB any mortgage on a house has nothing to do with the imputed income. Equity is in general a concept invented by real estate agents to confuse people. I.e. nobody builds "equity" unless you are in a non recourse state. You just own an asset and pay off a debt.
We are dealing here with any asset which is used by the owner (houses are the biggest, but the concept applies to others)

A house is an investment and consumption at the same time. You are making the investment to avoid paying rent.
The key question is always "would you rent the house you own at its current fair market value?"
That is what tells you if it is a good investment or not for you.
sscritic
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Re: Imputed income (rent) Owner occupied houses.

Post by sscritic »

"would you rent the house you own at its current fair market value?"
If not, do I have to sell and buy another? And when I buy another, do I go on a tour and think, "I would pay $xxx a month to live here" and then multiply by 240 to get my bid price?

"Hmm, this should rent for $2000 a month, I can pay up to $480,000 and still get a deal."

Does anyone really do that?

Now here are Zillow's rent estimates for four houses that I am familiar with and the corresponding percentages:
$2816 (6.2%)
$2843 (5.6%)
$4187 (5.7%)
$3190 (4.7%)

I don't know if Zillow didn't get the message or if their rents are off or their values are off. Actually, the average is about 5.5% for these four homes. Clearly, they are less expensive than typical homes, with the exception of the last (lower rent to value ratio means the house is more valuable or the rent is too low or something like that).

P.S. I am so old that the standard was rent your house for 1% a month. A $40,000 house would rent for 400 a month or 12% per year. I don't know when this 5% stuff came in, but I have seen it before. It's closer to the 1/2% a month rule, 6%. I think that is a 90s thing.
MnD
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Re: Imputed income (rent) Owner occupied houses.

Post by MnD »

A raccoon last night ate a not insignificant portion of a beam on an old pergola attached to the beloved 1952 large money pit home.
The portion the raccoon ate (upon inspection) had carpenter bees in it, so he/she was after the bee larvae.
Oh well - it was kind of like the maggots they use now to clean out wounds. They just eat the rotten parts. :beer
70/30 AA for life, Global market cap equity. Rebalance if fixed income <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.
Clive
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Re: Imputed income (rent) Owner occupied houses.

Post by Clive »

Professor Emeritus wrote:I am simply fascinated that Bogleheads who analyze investment portfolios to multiple decimal places do not analyze their imputed income and its related housing expenses.

Most studies use an average of 5 percent of the capital value of a home as the imputed income.
7.5% average yearly gross rent, less 2.5% maintenance costs (for 5% net) is on the high side IMO. Mine is around 1%

Code: Select all

UK National average house
	Price Gain, Gross Rent Yield
1987	12.0	7.5
1988	29.1	6.7
1989	7.4	5.8
1990	-10.7	6.7
1991	-2.3	7.9
1992	-6.5	8.9
1993	1.8	9.6
1994	2.1	9.9
1995	-2.3	10
1996	8.3	10.1
1997	12.1	9.4
1998	7.3	8.7
1999	12.6	8.1
2000	9.4	7.4
2001	13.4	7.3
2002	25.3	7.3
2003	15.5	6.9
2004	13.9	6.1
2005	3.2	5.8
2006	9.3	5.5
2007	6.9	5.4
2008	-14.7	6.6
2009	3.4	6.7
2010	0.5	7.1
2011	1.1	7.1
2012	-1.1	7.6
2013	7.0	7.5
The key question is always "would you rent the house you own at its current fair market value?" That is what tells you if it is a good investment or not for you.
Mentally I account as though I rent my own home. My tenancy agreement is very flexible and also being the landlord the rent is very tax efficient (being imputed).

Over time generally house prices might broadly rise with inflation, and there's tax efficient imputed income. Much like stocks where share prices broadly rise with inflation and pay dividends. I could sell, invest the proceeds in stocks and move into a similar sized/location home, and perhaps be no better or worse off.

For the retired Dr Bernstein suggest something like loading up safe assets with enough to cover 20 - 35 years of expenses after discounting pensions etc. Assuming a 30 year TIPS ladder is loaded with such and you own your own home, then both your expenses and rent are covered, You have somewhere comfortable and dry to sleep and food on the table - pretty much assured. The rest - can be invested in stocks. With a initial third in each (stocks, home, bonds) left as is for 30 years (bonds drawn-down, stocks accumulating), there's a good prospect for ending 30 years with a comparable inflation adjusted total wealth amount as at the start (i.e. if stocks total gains grow at 2.3% annualised real then the 33 initially in stocks doubles to 66, covering the initial 33 in bonds that has drawn-down to 0).

Someone with $1M with £333K in each of stock, home, bonds might broadly compare with someone who had $666K in stocks and $333K in bonds and who rented. Home/land however can be tax efficient (imputed rent, worked woodland in the UK can be exempt inheritance tax (death duties) and yield dividends via crops grown etc.). Many however opt to ignore that and consider a home to be just a consumption item.
Clive
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Re: Imputed income (rent) Owner occupied houses.

Post by Clive »

sscritic wrote:P.S. I am so old that the standard was rent your house for 1% a month. A $40,000 house would rent for 400 a month or 12% per year. I don't know when this 5% stuff came in, but I have seen it before. It's closer to the 1/2% a month rule, 6%. I think that is a 90s thing.
12%/year sounds more like a 80's thing. Generally you might anticipate stock share prices broadly rising with inflation coupled with a dividend yield that broadly compares to cash rates. For a home you might also expect a price that rises with inflation and a rental amount that compares to cash rates. Generally stocks prices will rise a bit more than that, whilst for houses the yield/rent will be a bit more.

1980's had cash, mortgages, inflation etc more up towards 12% levels. More recently (pre 2008 crisis) 5% was more the 'norm'.

Accounting for imputed rent, house prices etc. can gleam some insight into relative valuations. For example (for UK)

National average wage £26K
Couples state pension £12K
Drop 30 years of state pension amounts into a 30 year inflation bond ladder = £360K
Live in a comparable amount home = £360K
Same again in stocks = £360K
= Total £1080K

Bonds drawn down, stocks left to grow, generally might end 30 years with a similar amount as at the start in inflation adjusted terms.
Disposable income = £24K (similar to the average wage)
Avoid having to pay 7% rent (£25K imputed income) but have some maintenance costs - i.e. a couple on two lots of the national average wage.

In contrast, someone might rent and invest solely in stocks. State pension of £12K, another £12K of disposable required, rent £25K = £49K total. £12K via pension, £37K required from £1080K invested in stocks = 3.4% required dividend yield. Recent largest 100 UK stocks dividend yield (FT100 index) = 3.5%. i.e. give or take, in the same ballpark region.

So typically for the average couple who have kids and want to leave an inheritance the magic number is £1M of assets/wealth. For a single person, no kids (no inheritance) the single person state pension = £6K, live in a national average £180K flat/apartment and have 30 x 6K = 180K in a 30 year inflation bond ladder that's drawn-down (£360K total wealth magic number). Disposable income £12K, avoid paying £12K in rent (7% imputed) = £24K gross 'wage' (comparable to national average wage).

Or they might not own their own home and have £360K in stocks, draw-down at 5%/year (£18K, which when supplemented with £6K state pension = £24K/year (national average wage)) and spend around half of that on rent.

Of course actual individual cases vary enormously around the average level, as do actual choices (such as perhaps having a additional occupational pension (or annuity) instead of bonds ...etc.).
Topic Author
Professor Emeritus
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Re: Imputed income (rent) Owner occupied houses.

Post by Professor Emeritus »

sscritic wrote:
"would you rent the house you own at its current fair market value?"
If not, do I have to sell and buy another? And when I buy another, do I go on a tour and think, "I would pay $xxx a month to live here" and then multiply by 240 to get my bid price?

"Hmm, this should rent for $2000 a month, I can pay up to $480,000 and still get a deal."

Does anyone really do that?

Now here are Zillow's rent estimates for four houses that I am familiar with and the corresponding percentages:
$2816 (6.2%)
$2843 (5.6%)
$4187 (5.7%)
$3190 (4.7%)

I don't know if Zillow didn't get the message or if their rents are off or their values are off. Actually, the average is about 5.5% for these four homes. Clearly, they are less expensive than typical homes, with the exception of the last (lower rent to value ratio means the house is more valuable or the rent is too low or something like that).

P.S. I am so old that the standard was rent your house for 1% a month. A $40,000 house would rent for 400 a month or 12% per year. I don't know when this 5% stuff came in, but I have seen it before. It's closer to the 1/2% a month rule, 6%. I think that is a 90s thing.
1) The goal is transparency and rational efficient action. A house is an investment that yields inflation protected tax free income in the form of imputed rent, which is immediately consumed in the form of shelter. For many people it is the largest single asset they hold. Playing around with bogus "asset allocation" that ignores the largest asset is simply silly.

2) The 1% per month dated to a time when land costs were low compared to structural costs. At one time houses were often valued at 3 times the land. The land my house is on is worth 3 times the structural value. Owners and renters have different expectations from land. Only owners can expect to redevelop land so the payment for a short term rental does not reflect the redevelopment value of the land
dkturner
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Re: Imputed income (rent) Owner occupied houses.

Post by dkturner »

Professor Emeritus wrote:Playing around with bogus "asset allocation" that ignores the largest asset is simply silly.
The Boglehead mind functions best when dealing with stuff which has an exact known monetary value at any given time. We don't do housing or pension values very well.
Topic Author
Professor Emeritus
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Re: Imputed income (rent) Owner occupied houses.

Post by Professor Emeritus »

dkturner wrote:
Professor Emeritus wrote:Playing around with bogus "asset allocation" that ignores the largest asset is simply silly.
The Boglehead mind functions best when dealing with stuff which has an exact known monetary value at any given time. We don't do housing or pension values very well.
It is of course the classic distinction between precision and accuracy
dkturner
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Re: Imputed income (rent) Owner occupied houses.

Post by dkturner »

Professor Emeritus wrote:
dkturner wrote:
Professor Emeritus wrote:Playing around with bogus "asset allocation" that ignores the largest asset is simply silly.
The Boglehead mind functions best when dealing with stuff which has an exact known monetary value at any given time. We don't do housing or pension values very well.
It is of course the classic distinction between precision and accuracy
:D reminds me of the old joke: Q. How can you tell that an economist has a sense of humor? A. He uses decimal points.
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Re: Imputed income (rent) Owner occupied houses.

Post by placeholder »

I don't include my house or any associated aspects (loans etc.) in my investment portfolio at all.
ralph124cf
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Re: Imputed income (rent) Owner occupied houses.

Post by ralph124cf »

In coastal California, with insane land values, a landlord is lucky to get 1/2% per month in rent. In northern Illinois, due to the still depressed real estate market, a landlord can easily get 2% per month for a condo rental, although 25% of that could be eaten up by condo association fees.

Ralph
dkturner
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Re: Imputed income (rent) Owner occupied houses.

Post by dkturner »

ralph124cf wrote:In coastal California, with insane land values, a landlord is lucky to get 1/2% per month in rent. In northern Illinois, due to the still depressed real estate market, a landlord can easily get 2% per month for a condo rental, although 25% of that could be eaten up by condo association fees.

Ralph
My point exactly. Bogleheads don't "do" residential real estate because it's hard - they can't look it up instantly, like the value of an index fund.
Rodc
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Re: Imputed income (rent) Owner occupied houses.

Post by Rodc »

FWIW in my neighborhood my house would rent for right at 5% of value for a year.

I also do not understand not factoring in housing value.

I live in a neighborhood built in the mid 1950s. Twenty some years ago when I bought my house many of the houses still had original owners.

Of the 10 such neighbors about half planned to sell sometime after retirement to realize the cash to down size, to move into assisted living or other elder housing situation. That is they made plans based on SS, pensions, savings and home values.

In the end every single one ended up selling to realize the value of their house, including those who said they would never sell, house for their kids inheritance, etc. Of course some folks do manage to stay in their homes to the bitter end, it just did not work this way for this small set of folks.

But given the reality that often things don't work out the way we might wish, I don't understand folks who are so certain that they would never sell their homes that they feel it is a waste of time to at least run some retirement scenarios, to at least consider what a plan that included selling their house would look like.

Back to the OP, here overhoused seniors is a problem for some non-trivial fraction of seniors as housing prices have risen considerably faster than inflation over the last few decades, as have property taxes, so you see things like elderly in million dollar homes but struggling on small incomes. If they sold early enough to use the money to live a little better in a smaller home while still active it would really help, as opposed to waiting until the bitter end to sell to pay for the last year in a nursing home.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
richard
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Re: Imputed income (rent) Owner occupied houses.

Post by richard »

What exactly are we supposed to do about this?

Instead of thinking I need $X of annual income from my portfolio to cover expenses, I should think I need $X plus my imputed rent of $Y, but $Y is covered by house, so I only need another $X from my portfolio?
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ThePrune
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Re: Imputed income (rent) Owner occupied houses.

Post by ThePrune »

Thanks for getting this thread started. Doing some reading about imputed rent has been on my "To Do" list for quite a while, and this gave me an opportunity to get started.

I'll share just a few of my initial thoughts. First, housing purchase prices in my area of Michigan are quite low compared to rent. I know for a fact that for me to rent an equivalent home would cost at least 10% of the gross sales price of our home. Hence on a qualitiative basis I have little motivation to sell and become a renter.

But I AM motivated to look up some historical data and compute the IRR for my house "investment" based on imputed rent versus all my forner mortagage costs and other house related expenses.

As a retiree I follow an essential expenses versus discretionary expenses approach to guide my investing. If I were to be renting in retirement, I would definitely consider the rent to fall within my essential expenses. Therefore I would plan to use very safe investments to supply the income to cover that rent: TIPS bond ladders, inflation-adjusted SPIA's and similar. At first glance therefore I would tend to place my home within the cash+bonds portion of my asset allocation. Just for fun I decided to see how so including my house relsale value would shift my % in equities. My current 43% equities would be reduced to 39%. (My house is a small fraction of my overall wealth!) For me that's just not enough of a shift to be concerned about.

But once again, I very much appreciate this posting thread and how it has finally prompted me to begin thinking about this topic.
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IlliniDave
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Re: Imputed income (rent) Owner occupied houses.

Post by IlliniDave »

Professor Emeritus wrote:Imputed income is an extremely well known economic concept
http://en.wikipedia.org/wiki/Imputed_income
http://www.bea.gov/faq/?faq_id=488
http://www.clearonmoney.com/dw/doku.php ... puted_rent

I am simply fascinated that Bogleheads who analyze investment portfolios to multiple decimal places do not analyze their imputed income and its related housing expenses.
Most studies use an average of 5 percent of the capital value of a home as the imputed income.
I had a relative who lived in an $800.000 house with a 40,000 a year pension.
She simply could not understand that she really had an "income" of 80k and was in effect "spending" half of it on housing.
(yes I know you have to include selling costs, so the capital value of a house is after cost of sale)
I understand the mathematics, but thinking in terms of imputed income seems to complicate things unnecessarily and is of no specific benefit to me. So I don't waste my time with it. It seems more direct to look at the value of the house and determine what the money invested with something like a 3% SWR would produce. So when comparing a $200,000 and $300,000 house; your giving up $250/month potential lifetime income (the kind you can buy food and clothes with) if you go with the more expensive house because you have less money invested to produce income. Plus on the expense side of the ledger you'll probably have more taxes and possibly more maintenance. Seems like maybe trying to be less elegant in the explanation may have helped your relative understand.
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Frugal Al
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Re: Imputed income (rent) Owner occupied houses.

Post by Frugal Al »

Professor Emeritus wrote:I am simply fascinated that Bogleheads who analyze investment portfolios to multiple decimal places do not analyze their imputed income and its related housing expenses.
I'm certain there are many Bogleheads who DO analyze imputed income and housing expenses, especially those who are nearing retirement and are contemplating downsizing. I think you've made a broad assumption.
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Re: Imputed income (rent) Owner occupied houses.

Post by AlohaJoe »

sscritic wrote:"Hmm, this should rent for $2000 a month, I can pay up to $480,000 and still get a deal."

Does anyone really do that?
When I was looking at buying a house in Sydney, Australia, that's pretty much exactly the conversation I had in my head. With those exact numbers, too, since I was paying $2,000 a month in rent. :)
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Re: Imputed income (rent) Owner occupied houses.

Post by placeholder »

Figuring out your housing expenses in retirement is a useful exercise for those who are near to that stage but to me this imputed rent is not.
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thedayisbrave
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Re: Imputed income (rent) Owner occupied houses.

Post by thedayisbrave »

What happens when you're an owner occupant but decide to rent out a spare bedroom for what would equate to slightly > than 5% of the capital value of the home?
Johno
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Re: Imputed income (rent) Owner occupied houses.

Post by Johno »

Professor Emeritus wrote:
I am simply fascinated that Bogleheads who analyze investment portfolios to multiple decimal places do not analyze their imputed income and its related housing expenses.
Most studies use an average of 5 percent of the capital value of a home as the imputed income.

NB any mortgage on a house has nothing to do with the imputed income. Equity is in general a concept invented by real estate agents to confuse people. I.e. nobody builds "equity" unless you are in a non recourse state. You just own an asset and pay off a debt.
We are dealing here with any asset which is used by the owner (houses are the biggest, but the concept applies to others)
I'd add that while the mortgage doesn't affect the imputed income, it should also be considered carefully in the context of the entire investment portfolio, as should the house itself. If you get a slightly bigger mortgage for a given house and have as a result more money to put into financial assets, the extra mortgage amount is at the margin financing those extra financial assets. If the extra assets happen to be high grade bonds in a taxable account, that doesn't make any sense: it's borrowing at a higher rate to invest at a lower rate. Many other permutations are possible, considering stock investments and importantly also tax deferred rather than taxable investment accounts. And as with the concept of 'home equity' consideration of the mortgage wrt financial assets also depends somewhat on the laws of your state (recourse v non-recourse, and other considerations of what actually practically happens in a default). However looking at the leverage you apply with a mortgage completely in isolation from your financial assets is like looking at the real estate portion as a whole completely separately from financial assets: it makes for a simpler, easier discussion, more easily generalized to people in different circumstances, but not necessarily an accurate discussion.
dkturner
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Re: Imputed income (rent) Owner occupied houses.

Post by dkturner »

thedayisbrave wrote:What happens when you're an owner occupant but decide to rent out a spare bedroom for what would equate to slightly > than 5% of the capital value of the home?
I imagine one could either (1) increase the value of the "imputed" rent, or (2) use the newly acquired cash rent to reduce occupancy expense.
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