Im new to financial formulas so bear with the novice in me. When you hear, guy X bought a property for $400,000 and 20 years later it was sold at a much higher price , and they just subtract sold price from purchase price and go wow. They don’t factor interest paid on mortgage, renovations, utility costs, and most importantly inflation. So whats is a true formula of calculating the true appreciated value?
So whats is a true formula of calculating the true appreciated value?
The formula depends on the reason for the calculation.
If you want a back of the envelope calculation; then sales price minus purchase price is a good way to do it.
If you want to know if you owe taxes and how much; then you follow the formula the tax laws require you to use. That may mean it factors in a capital improvements that you made.
If it was an investment property; then again you follow the tax laws but that may include depreciation. It may also allow you tax deduct some repairs over the years.
Now that the basic calculations are done some people then look at what the average annual increase was to get that growth, and they compare it to the initial cost to see what returns they had. They do look at how that compares with inflation.
If the property was an investment property they look at what they could have done if they had invested in other things. If they started with a $50,000 down payment 20 years ago, then how did it compare to investing in the stock market, or some other investment. Some take it farther and try to factor in their time need to generate that growth.
Things like utilities, interest, and property tax are more complex if it wasn't an investment property. The expenses would still have occurred no matter where you lived, or if you rented or owned. Sometimes the items are hidden in the rent, and sometimes they are broken-out, but they are always there. You also would have had to pay rent to somebody else if you didn't own the house.
That is why if you hear that somebody sold their place for big X, and they bought it for little x, it is easy to do the subtraction and say WOW!; because only the homeowner can do all the calculations.