Financial Jungle wondered in a recent post why some people leave out the value of their home from their net worth statement. A common reason advanced is that “my home doesn’t provide me with an income”. While it is true that a home you live in doesn’t produce a positive cash flow, it provides you with an invisible income in the form of a rent that would otherwise be paid to a landlord.
Let’s take an example to illustrate this point. Joe owns a standard two-storey house in the Eastern suburbs of Ottawa, which has a current value of about $253,000 (using data from Royal LePage) and would rent for an estimated $1,600 per month. If Joe owns the home free and clear, he is deriving a value from his residence that is worth $19,200 (gross) annually. If he were to rent the house, his landlord will pay the property taxes ($3,300 per year) and take care of the maintenance (we’ll assume it to be roughly 1.5% of the home value). If we further assume that Joe is responsible for the utility bills, the home provides Joe with an annual “income” of approximately $12,000. Best of all, the “income” provided by Joe’s home is not taxed because he is simply transferring money from one pocket to another. Your personal residence does provide you with an income; you just don’t see it.