Imputed Rent: A Better Way to Calculate Your Savings?
If you own your home, then you may be miscalculating one of your biggest advantages when it comes to savings. Property is fundamental to savings and investment. It’s the solid investment that is constantly recommended no matter how the economy shifts.
Because so many of us own our own homes, it could also be considered the most common form of investment in the modern economy. When talking about the money earned on our homes, we often talk about paying off mortgages and the rise in property values. But there’s one thing that’s often overlooked – imputed rent.
What is Imputed Rent?
Imputed rent is what people are willing to pay to occupy a property. It’s a reflection less of supply than of demand, and as such of the value that can be attached to a property or a room within it, regardless of how much it cost.
But when we talk about imputed rent as a form of savings, we’re talking about something more specific – your imputed rent as a home owner.
This is the amount that you would have to pay to rent the property you live in – or the part of it you occupy if you also have tenants.
It’s money that you’re saving just by owning your own home, but that we don’t often think about as either income, outgoing, or saving.
Imputed rent represents a huge proportion of the British economy.
The New Economics Foundation calculated that, in 2014, the amount that home owners would be paying if they rented their homes was a total of £158 billion. That’s a huge amount of rent that home owners are effectively paying to themselves, and that gets missed out of economic calculations.
Some other countries officially recognise the value of imputed rent.
For example, in the Netherlands (https://www.businessinsider.com/imputed-rent-hidden- tax-break-homeowners-2016-9?r=US&IR=T), home owners readily accept paying tax on the rent that they would have had to pay. It’s an approach that’s currently used by a total of five countries, and that many believe makes for a fairer tax system, as it removes a big tax break that renters miss out on.
Bringing in a tax like this would be political poison in the UK, given attitudes to public and private property, as well as our near cultish attachment to the idea of home ownership.
But that doesn’t mean that imputed rent can’t be useful.
Why Bother with Imputed Rent?
Imputed rent can be valuable for anyone working towards financial independence and who wants to accurately measure how close they’re getting to that goal.
By taking into account the expense you’re paying to yourself, it gives a better measure of what you’re saving.
Calculations using it will more accurately reflect how your property affects your financial wellbeing.
Doing this is relatively straightforward. You simply take the rent that you would be paying to yourself, add it to your passive income, and add it to your household expenses. Once expenses are taken away from income, the end results are the same, so there’s no magical appearance or disappearance of money. But when you look at your proportion of income and savings to expenses – vital to checking how close you are to financial independence – it will make a difference to the outcome.
This might sound like nonsense. After all, you’re already taking this money into account in paying off your mortgage, right?
Wrong.
That mortgage payment is accounted for elsewhere, in the expense of interest payments and the wealth you’re building up through ownership of your home.
In the meantime, you’re also saving money by not paying rent to someone else, and even once the mortgage is paid off, you’ll keep making that saving.
How Can you Evaluate Your Imputed Rent?
So how can you work out your imputed rent?
In the same way that you would work out what to charge if you were renting out your home. There are a few options for this.
The easiest is to multiply the value of your house by 5%, the yield a landlord would be looking for. This is the method used in some countries with imputed rent taxes. Its drawback is that it doesn’t always reflect the rental prices created by consumer demand, which may not be in line with house prices.
Another option is to ask a letting agent for an evaluation. The problem here is that letting agents are going to expect a chance to rent out the property off the back of such an evaluation. Getting them to evaluate your rental potential might not be possible by honest means.
The most accurate method is to look on a sight such as Rightmove for comparable properties and see what rents the landlords are charging, then apply the same rate to your own home.
However you approach it, imputed rent can help you evaluate your financial worth, the proportion that you’re saving, and how close you’re coming to achieving financial independence.
Paul Connolly
Paul Connolly has been a journalist for more than 20 years, as a reporter and editor for Argus Media, Reuters, The Times, Associated Newspapers and The Guardian. He has covered Islamic Finance for Reuters in the 1990s. Paul has since helped launch three newspapers, as well as reported from Tokyo, Los Angeles and Stockholm.
