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Re: do you count your house as the RE part of your allocation?
Old 04-02-2006, 11:51 AM   #41
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Re: do you count your house as the RE part of your allocation?

I don't care much about GAAP for this situation. I think there's only two times when this question has relevance:

- Will the lawyer who's suing your pants off consider your house an asset or a liability?

- How will the divorce lawyer treat your house? If your ex-spouse gets it then it's an asset. If you get it then it's a liability.
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Re: do you count your house as the RE part of your allocation?
Old 04-02-2006, 12:09 PM   #42
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Re: do you count your house as the RE part of your allocation?

Quote:
Originally Posted by donheff
It seems to me that net worth is an end-of-game concept (i.e., what's left if I die). So for net worth you don't need to figure in rent - no rent when you are dead. In other words, rent is not a liability you deduct from your net worth. A mortgage is, however, because your estate would have to pay it off in one way or another. Another way to think of it is that expenses are irrelevant to net worth, debt is not.
Of course you are right. But if I include our four-plex as an asset when determining what we can withdraw from our "portfolio", I need to assume rent as a possible expense because the fourplex might be converted to another type of income producing asset, but we will then need to pay rent as an expense.

I know this situation is uncommon. But it helps illustrate underwhat circumstances may a home be included not only in your net worth, but as part of your "portfolio." Another example would be when your home generates cash via a reverse mortgage.
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Re: do you count your house as the RE part of your allocation?
Old 04-02-2006, 12:59 PM   #43
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Re: do you count your house as the RE part of your allocation?

like i said before net worth is measured in cash....unless of course of death,divorce or assets counted towards a loan...if some thing is ready to be sold or can be readily sold at this very point in time its an investment...if if its not ready to be sold or cant be sold its personal property ..be it a painting ,rare coins,the home we live in....if the item is something we need to live on or in its not an investment...it may be an investment one day when it moves out of the personal property area and goes up for sale....my origional artworks are not for sale at this time.i would not count them as an investment...my rare road bikes are not for sale ,they are personal property at this time....just because somethings rare or valuable dosnt make it an investment or part of an allocation plan...we wouldnt count our jewerly or diamond ring as part of our precious metals portfolio....
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Re: do you count your house as the RE part of your allocation?
Old 04-02-2006, 12:59 PM   #44
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Re: do you count your house as the RE part of your allocation?

If you say it three or four more times, your opinion might become fact!
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Re: do you count your house as the RE part of your allocation?
Old 04-02-2006, 01:00 PM   #45
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Re: do you count your house as the RE part of your allocation?

maybe ill even believe it myself ha ha ha
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Re: do you count your house as the RE part of your allocation?
Old 04-02-2006, 01:43 PM   #46
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Re: do you count your house as the RE part of your allocation?

Many thanks to brewer and Ed the gypsy for some suggestions on diversifying into foreign bonds and REITs...

Sorry that somehow the hoary "renting vs. owning" issue has reared its ugly head.. Not my fault! *:P

I have a LOT of individual stocks (33 stocks and 9 funds) and am trying to get a handle on asset allocation a la Bernstein. I need to go slow not to incur too many capital gains for no reason, so I'm trying to see what I can do with my 7% cash that will enhance the mix. Hence wondering whether REITs fit or not, given a large home equity. That's all.

Someone with an identical net worth but who rents will be using their income from all sources to cover their housing expenses; a sample allocation might have 10% in REITs... Let's say our renter is has a $1MM portfolio, $40k income and is paying $1200/mo. in rent ($14,400/year).

Now switch to the homeowner. Let's give him an income of $25,600 (what the renter has left over after rent). *He's got a portfolio of $640,000 to throw that off. And he's got a $360,000 house (or less, 'cause we have to take into account prop. taxes & expenses, so let's low-ball those and say $700,000 portfolio and $300,000 house). If the owner has no REITs or other real-estate investment other than his house, he's still at 30% RE versus the renter's 10%.

It is true that you are not going to perceive the total value of your home until you sell it. It's also true that you won't perceive the total value of ANY of your investments until you sell them.

• Sell home => get $ => use $ to buy another home or start paying rent.
• Sell investments => get $ => use $ to buy more investments or...??

• Keep house => get 'income stream' equal to fair market rent without having to pay taxes on it (except in Italy and other weird-ass socialist places). House could appreciate or could lose value.
• Keep investments => get income stream with which to pay rent, etc. Investments could appreciate or could lose value.

A lot of things we 'spend' money on are 'investments' of some kind, even if they are poor ones. Buying a lottery ticket is an investment with an average return of .000001%. But if I buy a couch instead of going to Rent-A-Center, is that not a decent investment (like people's references to annuities, above) that will pay me back over time in 10 or 15 years of "couchitude" (or couchiness, or couchation), putting me ahead of the couch renter?

And to answer mathjak... I damn sure do have in the back of my mind that my jewelry could be used to raise cash in a pinch (think stranded somewhere in an emergency). I also don't see why rare coins couldn't be sold.. Ok, my house might take a month to sell, but it can't be an investment because it's less liquid? Are annuities and hedge funds liquid? Does that make them 'not investments'? Just like your bikes, my stocks are currently not for sale, btw..

---
The many "rent vs. own" discussions haven't been likely to have changed anyone's mind on the matter. Home ownership and renting each have a lot of lifestyle benefits and lifestyle hassles that are going to make or break that decision for most people; they're not going to feel differently about what suits them unless the financial benefits of one or the other are gigantic, which they aren't.

Looking at it that way (home 'investment' or lack thereof is a fixed decision, non-negotiable) I suppose I will indeed choose to put some RE into my investment portfolio asset allocation mix, since it's that subset on which I'm operating, and of which I'm concerned about reducing volatility. As others have already noted, volatility of the value of the house you live in is not a concern if you are not planning to sell.

Thanks for the insights, everyone!*
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Re: do you count your house as the RE part of your allocation?
Old 04-02-2006, 02:08 PM   #47
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Re: do you count your house as the RE part of your allocation?

Your original post indicates that you understand the issue.

When I finally paid off the mortgage I assumed that the income stream I needed to live on was lower. I also increased my stock/bond allocation since I used lower yeilding bonds to pay.

The thing to watch out for is assuming your house is an investment asset and at the same time using the lower income stream the house affords you in your FIRE calculations.

Ooops, I read your post above thinking it was the original. Good summary!
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Re: do you count your house as the RE part of your allocation?
Old 04-02-2006, 03:05 PM   #48
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Re: do you count your house as the RE part of your allocation?

I 've always figured the house is part of the net worth since it will be tapped eventually (via downsizing or reverse mortgage).

BUT I do not add the house equity into the 4% withdrawl calculation. Since this would create an artificially high withdrawl rate. Don't want to caught borrowing against the house to eat.

For those who include the house ... Is the house part of the 4% withdrawl ??
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Re: do you count your house as the RE part of your allocation?
Old 04-02-2006, 03:14 PM   #49
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Re: do you count your house as the RE part of your allocation?

No

But if the 4% thing ever doesnt work and I run out of money before I get old enough to tap other sources of income, the house turns into a cash cow.

Firecalc does have a place where you can put in the presumed year of selling your house and how much you get for it, doesnt it? Havent used it in a while.
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Re: do you count your house as the RE part of your allocation?
Old 04-02-2006, 04:51 PM   #50
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Re: do you count your house as the RE part of your allocation?

Quote:
Originally Posted by tryan
For those who include the house ... Is the house part of the 4% withdrawl ??
Absolutely not. The reverse mortgage is a emergency measure if the doom predictors are right and 4% starts to eat up too much of the nest egg.
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Re: do you count your house as the RE part of your allocation?
Old 04-02-2006, 04:51 PM   #51
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Re: do you count your house as the RE part of your allocation?

yup, the house is the safety net ... pull a reverse mortgage instead of eating cat food.
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Re: do you count your house as the RE part of your allocation?
Old 04-02-2006, 04:54 PM   #52
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Re: do you count your house as the RE part of your allocation?

Quote:
Originally Posted by tryan
I 've always figured the house is part of the net worth since it will be tapped eventually (via downsizing or reverse mortgage).*

BUT I do not add the house equity into the 4% withdrawl calculation.* Since this would create an artificially high withdrawl rate. Don't want to caught borrowing against the house to eat.
Right on. *That is really the meaty question: *How does the home value affect SWR. *Among the published SWR articles I've read, almost all say not to include your home value in your SWR calculations. *This is a conservative approach and there's nothing wrong with being conservative in that way.

It makes sense to leave the house out of SWR calcs because none of the SWR studies take real estate into account... *In order to calculate a worst-case SWR you would need Shiller like data for every housing market for all time. *Since that data doesn't exist, home prices can't be included in any historical worst case SWR studies. *And there's surely going to be some housing market somewhere where local values dropped even more than the stock market in the worst periods, so a historical SWR study including housing would necessarily find a lower worst-case SWR.

Hence it's fairly well agreed that you can't plug 100% of your home value into any normal SWR calculations. *But I would also argue that assuming 0% of your home can produce retirement income is way too conservative. *You can indeed get income out of a house from reverse mortgages, downsizing, or even just selling to rent more cheaply.

So the way I look at it is that some percentage of my home (less than 100% and more than 0%) can be included in the SWR calculations. *I am still not sure exactly what percentage to use. *This is part of why SWR is still an art not a science.

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Re: do you count your house as the RE part of your allocation?
Old 04-02-2006, 05:03 PM   #53
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Re: do you count your house as the RE part of your allocation?

Hmmm

I didn't count my house in my SWR calculation.

Katrina made the question academic anyway.

Now in twenty years I'll be 82 - may or may not count the house if I'm living in one.
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Re: do you count your house as the RE part of your allocation?
Old 04-02-2006, 05:17 PM   #54
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Re: do you count your house as the RE part of your allocation?

Quote:
In order to calculate a worst-case SWR you would need Shiller like data for every housing market for all time. Since that data doesn't exist, home prices can't be included in any historical worst case SWR studies.
This is the pickle I am in ... FIRE'd on rental property. Relying on calculators that use historical stock and bond performance while I am ~75% real estate.

Just have to figure, if all hell breaks loose ... a part time job at a golf course or ski resort is not the end of the world.
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Re: do you count your house as the RE part of your allocation?
Old 04-03-2006, 04:24 AM   #55
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Re: do you count your house as the RE part of your allocation?

Quote:
Originally Posted by Maximillion
$500,000 worth of R.E* costs you about $40,000+ to sell, that's a lot more than ETrade.
Maximillion, if you have mutual funds you may easily be paying 1% a year in costs that E*Trade has nothing to do with.. hold them ten years and there, you've paid your 10%. Instead, to sell my house I paid just over 5% and owned it for 10 years so for me transaction costs were .5%. My annualized gains, however, were a (tax-free) 10% yearly.

Anyway, maybe the house-buying strategy is not so different from the age-based investment strategies that dictate riskier and more expensive investments while young, taking the probable gains and switching out to less-risky and less-expensive investments later in life. Except in the portfolio scenario of 'down-sizing' you just push some buttons, whereas in the RE version you have to uproot yourself (away from the desirable areas for workers and commuters).

For tryan, the upside is that, unlike investments, the RE will always maintain a lot of its value; it can't go to zero. And the rents will more or less follow the general economy; hard to imagine them going way down and everything else staying up. The pro-renters have noted that prop. values in many areas are out of line with rents, though, so maybe that's a signal for you to look into selling and using the $ to diversify. That's what I'd do, but then again, I'd also prefer not to have the hassle of being a landlord. Best of luck!
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Re: do you count your house as the RE part of your allocation?
Old 04-03-2006, 07:59 AM   #56
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Re: do you count your house as the RE part of your allocation?

Quote:
RE will always maintain a lot of its value; it can't go to zero.
But boy, values can drop pretty darn close to zero.* Bought many of them for less than 20k in the early 90's.* Thefed cites property in Ohio for less than 20k on an earlier thread.* And rents were less than 1/2 of todays values.

Quote:
The pro-renters have noted that prop. values in many areas are out of line with rents, though, so maybe that's a signal for you to look into selling and using the $ to diversify.
Exactly why I'ld like to drop a couple more before the economy slows down ... now if I just had a vacancy.
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Re: do you count your house as the RE part of your allocation?
Old 04-03-2006, 01:16 PM   #57
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Re: do you count your house as the RE part of your allocation?

What are your leases like? If you are selling I think you can give a certain amount of notice and break the lease. I would talk to a realtor anyway.. you never know. They might have someone looking for income property that would take a place with tenants, if you can attest they are good ones.
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Re: do you count your house as the RE part of your allocation?
Old 04-03-2006, 01:59 PM   #58
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Re: do you count your house as the RE part of your allocation?

All are long term ... so they're tenants at will. Problem is in MA a judge will not "put a family homeless to facilitate a sale" (was told this many years ago). Second problem is the rents are about 1/2 of todays mortgage, taxes and insurance costs. No investor in the right mind will touch it with a 10 foot pole.

Hope is sell back to the tenants; working one now. But it's slow going (these people rent for a reason).
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Re: do you count your house as the RE part of your allocation?
Old 04-04-2006, 05:18 AM   #59
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Re: do you count your house as the RE part of your allocation?

Where is this, Cambridge? Or is Vida Urbana breathing down your neck? *

Is there rent control? If there isn't, why haven't you been raising the rents to keep up w/expenses? A tenancy-at-will means EITHER party can give 30 days' notice for no reason whatsoever, as far as I understand it. You can give 30 days' notice to raise the rent, too. Generally there are no limits as to how much, unless you are in some kind of gov't. subsidized tenant situation.

Take a look here:
Mass.gov site

Of course, before you take any action, make sure you are keeping up your end of the bargain w/r/t interest on sec. deposits, repairs, and so on...
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Re: do you count your house as the RE part of your allocation?
Old 04-04-2006, 02:39 PM   #60
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Re: do you count your house as the RE part of your allocation?

Quote:
Originally Posted by tryan
All are long term ... so they're tenants at will. Problem is in MA a judge will not "put a family homeless to facilitate a sale" (was told this many years ago).
We had a judge in our town who wouldn't do evictions either. Landlords just found another judge.

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