Comparing Home Buys Using the TCHO MetricTemplate

An effective home price calculated with the TCHO metric can be used to compare Townhomes with HOA to Single Family homes with extra utility expenses, and to a Duplex with rental income.

TCHO (True Cost of Home Ownership) is a holistic measure of home costs based on the market value of home and not on the mortgage payment. TCHO includes permanent costs (interest, property tax, HOA, etc.) and the opportunity cost of equity. For a new home buy, there is no equity yet. Every $1 of TCHO cost would buy $300 of primary residence. We will compute an effective home price using the TCHO metric which will allow us to compare the different types of home purchases. Please refer to “True Cost of Home Ownership (TCHO), a New Metric“ for a more in-depth look at TCHO.

First, let us look at the purchase of a $1M Townhome with a $400 HOA in a high-priced market like the San Francisco Bay Area. The interest and property tax portions of the TCHO reflect the listed purchase price. However, the HOA portion needs to be converted to an incremental purchase price using the TCHO factor of 300, resulting in $0.12M ($400 x 300) for a total effective home price of $1.12M.

Second, let us look at the purchase of a $1.5M Single Family home. There are no HOA fees here, but it has other costs incremental to a comparable Townhome such as home insurance, landscape, water, sewer and trash bills which add up to $250 a month. These costs are also summarized in our blog “Housing Costs.” After applying the TCHO factor to these costs, the total effective price works out to $1.57M.

Third, let us look at the purchase of a $2M Duplex with a $2,500 monthly rent. The TCHO metric is after-tax, and so we need to convert the rent to an after-tax value before applying the TCHO factor. Because rent here is an income and not a cost, it reduces the effective purchase price to $1.57M.

The TCHO metric normalizes the listed purchase price with dissimilar cost/income elements such as HOA fees, utility charges, or a rental income to come up with an effective purchase price that now can be used to compare the different types of home buys.

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