Skip to main content

You Pay Rent, You Pay Rent, Everybody Pays Rent

Image
By
photo of flat screen television

One of the major reasons people strive for a fully paid off house is the dream of living rent-free. The idea that homeowners don't pay rent is somewhat true, like golf being a sport.

Rent is money exchanged to use something without receiving residual value. A familiar example is paying your landlord to use their property. You get a place to live, but when your lease is over, you don't own anything. This is explicit rent, it's obvious and easy to calculate.

Another, less obvious type of rent is implicit rent. Implicit rent is not directly paid to anyone. It's expressed and paid in the form of opportunity cost.

Opportunity cost is the cost of choosing one option and forgoing another. Like when the Portland Trailblazers decided to draft Sam Bowie (choice) ahead of Michael Jordan (opportunity cost).

As a homeowner, you have a lot of capital tied up. Your capital could've instead be invested in the stock market. The growth you could have experienced is your opportunity cost.

The opportunity cost is essentially rent you're paying to yourself, hence implicit rent.

Below is a simple formula to calculate your implicit rent:

Implicit Rent =  After-Costs Home Equity (Home Equity - Transaction Costs) x Expected Portfolio Return

Example 

  • House valued at $500K
  • Average realtor transaction costs are 5%
  • Expected return of stocks is 7%

Annual Implicit Rent would work out to be:

$500K - ($500K * 5%) x 7% 
= $33,250 

Leading to a Monthly Implicit Rent of:

$33,250/12 Months 
= $2,771

You end up paying a monthly rent of $2,771 to yourself. If you can find a comparable home to rent for less or even slightly more (given all the costs associated with homeownership), you'll want to consider renting. There are many benefits that come with renting that could make it a better choice for you.

Homeownership can be great option for the right person. It all depends on your goals. Just be aware, if your goal is rent-free living, homeownership is not your huckleberry. 







Labels:

Comments

Post a Comment

Popular posts from this blog

Today's Special: Humble Pie

By
You champion a project, fight for an idea, and then...reality sets in. That churning in your stomach isn't butterflies, it's the realization you've missed the mark.  Pride will puff up your chest, and kick in the "defend at all costs" instinct. But arguing with the umpire never changed a call. Admitting you're wrong isn't a sign of weakness. It can strengthen your professional standing. In a world obsessed with the illusion of infallibility, the courage to adjust course is a breath of fresh air. It shows you're confident enough to be wrong, and adaptable enough to learn from it. Do your research, think critically, and stand behind your decisions. But when the data whispers (or screams) otherwise, don't be afraid to swallow that slice of humble pie. Be the first to acknowledge. Don't wait for someone to point out your mistake. Be open, take responsibility, and most importantly, focus on what you're going to do to address it. Don't dwell ...
Post a Comment
Read more

When Perfect Becomes a Problem: The iCar Story

By
Let's talk about Apple's iCar, or rather, the ghost of it. A decade. Ten billion dollars. Poof. Gone. Like a puff of smoke from a dream that never quite woke up. They wanted to launch a revolution, a fully-formed, flawless chariot. But revolutions aren't born in secret labs; they're forged in the messy, chaotic crucible of the real world. You don't build a movement by hiding in the shadows. You don't create a product people love by ignoring them. You don't change the world by waiting for perfection. It's about the minimum viable. It's about shipping early, shipping often, and listening—really listening—to the people you're trying to serve. Apple built a cathedral of secrecy. A monument to what might have been. And then, they tore it down.  They spent billions on a dream, while ignoring the simple truth: the market doesn't care about your dreams. It cares about solutions. It cares about things that work. So, here's the lesson: stop chasing...
Post a Comment
Read more

Why We Shouldn't Be Afraid of Ambiguity

By
Ambiguity. That fuzzy monster that chases us down darkened hallways, whispering doubts about our roadmap and feature sets. You know the feeling. You constantly wrestle with unknowns: Will users like this? Is this the right direction? Frankly, if you had a nickel for every time the answer wasn't crystal clear, well, you might actually want to chase that ambiguity down the hall. But here's the thing: ambiguity isn't your enemy. It's your dance partner. Innovation rarely happens in a land of perfect clarity. Sure, there's a time for well-defined processes. But when you're creating something new, there are bound to be more questions than answers. The key is to learn to waltz with the unknown .  Embrace the experiment. Don't be afraid to throw some spaghetti at the wall and see what sticks.  Focus on outcomes, not outputs. Don't get hung up on features. What problem are you trying to solve? How will you measure success? Get comfortable with "go...
Post a Comment
Read more