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If you’re thinking of buying a home in Las Vegas — congratulations! You just might make a bundle when the time comes to sell it.
That’s because the average annual internal rate of return for a homeowner in Sin City is 13.29%, according to a recent analysis by Betterment.
The so-called IRR is an investment’s return based on its related cash flows over time. In the context of owning a home, that cash flow includes the cost you pay each year to live there and maintain the dwelling.
Las Vegas has the highest IRR among 13 major U.S. cities the robo-advisor analyzed, taking into account median rents and median home values for a dwelling with a mortgage.
In its calculations, Betterment assumed the owner remained in their home for at least nine years.
“Some of the cities with the highest real estate appreciation have the lowest internal rates of return from the homeownership perspective,” said Nick Holeman, a certified financial planner at Betterment.
Charlotte, North Carolina, and Denver round out the top three metro areas with the highest annual internal rate of return, the firm found.
Property appreciation is only one criteria in determining how much you’ll earn on your investment once you sell, Holeman said.
“The biggest factor is how expensive those homes are relative to what you can rent,” he said. “It’s how expensive the home is versus the cost of renting.”
It takes time
The average rate of return homeowners should expect from their dwelling is between 8.6% and 10% a year — roughly about the same as investing in stocks, Betterment found.
“People view homeownership as a magical investment and a way to build wealth,” Holeman said. “The research shows it can be a way to build wealth, but it’s no better historically than stock market returns.”
Here’s the catch: Homeownership rewards those who plan on sticking around.
Consider that it takes about four years for homeowners to break even on their home due to the closing costs they paid upfront, Betterment found.
This can range from 2% to 5% of the purchase price and can include application fees and the first year of homeowner’s insurance.
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Prospective buyers may also overlook the ongoing cost of keeping a home, which can throw cold water on hopes for sky-high returns.
Larger scale projects, such as a renovation, will hit you even harder.
Property taxes also can be a significant outlay. The median amount of property tax paid for all U.S. homes with a mortgage is $2,709, Betterment found.
There’s also limited tax relief for homeowners shelling out for hefty property taxes.
The Tax Cuts and Jobs Act capped the amount of state and local taxes filers could claim on their federal return at $10,000.
Further, with a roughly doubled standard deduction, fewer taxpayers are itemizing and claiming those property taxes.
Only 6.18 million returns deducted personal property taxes for the 2018 tax year, according to IRS data through July 25.
In comparison, for that same year-ago period, 17.6 million returns took the break for the 2017 tax year, the IRS found.
An owner’s checklist
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Consider the following before you start searching for your dream home.
Staying long-term: Home sellers typically live in their home for nine years before putting their house on the market, according to the National Association of Realtors.
Remember the costs: Don’t focus solely on your mortgage payment versus what you’d pay in monthly rent. Add in utility expenses, property taxes, homeowner’s insurance and the extra you hold on the side for repairs and maintenance.
It’s still an investment: A home purchase won’t make you rich right out of the gates, but you should still treat it as an investment.
That means doing your due diligence on the property and the area before you commit, being aware of expenses and taking the long-term view.
“You should view it as an investment because it’s such a large purchase and a huge component of your financial journey through life,” said Holeman.