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ER, home value and net worth
Old 02-25-2018, 01:31 PM   #1
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ER, home value and net worth

I'm curious how others have thought about home value as part of their asset pool for ER. I know traditional wisdom is to not count this in your spendable assets, but for those retiring early with a family I would imagine downsizing at some point is part of the longer term plan.

In our case, our home would be about 25-30% of our net worth, so not insignificant. We have very young children and are looking at homes that have decent yard space with a bit of property in a HCOLA. Fine at 50, but I would guess by 70 we would downsize into a more manageable, less expensive property.

And in a related question, we're looking at a property which is more expensive than we had initially budgeted, but that has a rental unit as part of the property. If you're clearing 25k of income from the rental, what's a reasonable tradeoff vs cash? Is it crazy to think of this as equivalent to $Xin the market?
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Old 02-25-2018, 01:38 PM   #2
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I consider my two houses to be long-term care insurance. I don't consider them in my portfolio withdrawal rate, other than when I decided to have no mortgage so I'm not forced to withdraw more than necessary and hit certain tax cliffs.

The value of the rental unit portion of that property would certainly be equivalent to $X in the market, and is providing diversification for your portfolio.
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Old 02-25-2018, 01:45 PM   #3
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Originally Posted by tb001 View Post
I'm curious how others have thought about home value as part of their asset pool for ER. I know traditional wisdom is to not count this in your spendable assets, but for those retiring early with a family I would imagine downsizing at some point is part of the longer term plan.

In our case, our home would be about 25-30% of our net worth, so not insignificant. We have very young children and are looking at homes that have decent yard space with a bit of property in a HCOLA. Fine at 50, but I would guess by 70 we would downsize into a more manageable, less expensive property.
That's all fine, but I suspect at this point you would just be guessing what your house will be worth when you are 70 and how much you will spend on the downsized property.

For now, don't include your home in your calculations.

When you get closer to ER and start making more concrete plans, you can assess the sale value of your home, and you'll have a real idea about where you want to downsize and how much it will cost to do so.

At that point, you an add the net expected difference in sale prices into your projected assets, and fine tune your calculations. That's what we have done. We have a primary home and a vacation/weekend home that will turn into our primary residence once my wife fully retires. We expect that to happen in 3-4 years, so I have started including the current sale value of our home in our projections (minus the amount I expect to spend getting it ready for sale and the commissions I expect to spend).

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If you're clearing 25k of income from the rental, what's a reasonable tradeoff vs cash? Is it crazy to think of this as equivalent to $Xin the market?
It's income. Income is not in the market and it's not equivalent to $X in the market. Rental income tends to be hyperlocal. It doesn't respond to market conditions the way equities do. Instead it responds to rental market conditions specific to your locale. For example, if a new employer comes to your town, rental income may increase significantly. Similarly, if a major employer leaves, rental income could dry up. Neither of these might have anything to do with the overall economy.

Treat rental income as you do your salary for your primary job. If you have an expected plan for how/when you can increase the rent, treat that the same as anticipated raises to your salary.
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Old 02-25-2018, 01:52 PM   #4
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I consider my two houses to be long-term care insurance. I don't consider them in my portfolio withdrawal rate, other than when I decided to have no mortgage so I'm not forced to withdraw more than necessary and hit certain tax cliffs.

The value of the rental unit portion of that property would certainly be equivalent to $X in the market, and is providing diversification for your portfolio.
I've been thinking about the home as a back up in a SHTF scenario, with similar logic re the mortgage. When I plug numbers into ********, we look Ok, but there are so many variables over that time frame with young kids, especially regarding healthcare. I'm trying to build as many buffers as possible!

And I gues my real question is what do you think is the value of $X! If you think about a swr of 3.5%, is that like having an extra 700k in the bank?
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Old 02-25-2018, 02:03 PM   #5
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Joeaa, we must have cross posted. At this point we have enough in savings to cover the basics and then some using the online calculators. We're lucky to be in a place where we can put away a decent amount more over the next few years, but I increasingly find myself doing mental arithmetic--e.g. I can work for 6 more months and that covers an extra nice dinner out every week or lets us upgrade an annual trip. Right now, work is about the extras, which is a great place to be, but I'm trying to get a better feel for the trade off between this type of income vs the security of $ in the bank, if that makes sense.
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Old 02-25-2018, 02:07 PM   #6
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Originally Posted by tb001 View Post
I'm curious how others have thought about home value as part of their asset pool for ER. I know traditional wisdom is to not count this in your spendable assets, but for those retiring early with a family I would imagine downsizing at some point is part of the longer term plan.

In our case, our home would be about 25-30% of our net worth, so not insignificant. We have very young children and are looking at homes that have decent yard space with a bit of property in a HCOLA. Fine at 50, but I would guess by 70 we would downsize into a more manageable, less expensive property.

And in a related question, we're looking at a property which is more expensive than we had initially budgeted, but that has a rental unit as part of the property. If you're clearing 25k of income from the rental, what's a reasonable tradeoff vs cash? Is it crazy to think of this as equivalent to $Xin the market?
Personal residences don't count towards anything until you sell them and cash in the equity imo. Until then, you may have "plans" to get "some" of the equity out, but you're unlikely to have a good idea of how much you'll get until you actually do it, and until you do it the house is generating no income for you to consider in retirement planning.

As for your rental, I'd consider its post selling fees current value potentially only IF you planned on selling it. Otherwise it adds $0 to your portfolio, it just reduces your necessary income (assuming you are confident in the real estate market in that area not deteriorating during your retirement) by your net proceeds for the rental (taking into account expenditures likely in the future such as new roof, appliances, HVAC etc).
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Old 02-25-2018, 02:17 PM   #7
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House will definitely get downsized in a big way at some point but it is not a large portion of net worth. Perhaps 10-15% now. Interestingly, the sale of the house may not free up that much equity because the new place which will be much smaller, and perhaps not even have a land holding, may be just as expensive. Cottage will likely get passed onto the children although with the rate that the Great Lakes water levels are increasing, it may be underwater before then.
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Old 02-25-2018, 02:27 PM   #8
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Joeaa, we must have cross posted.

I'm trying to get a better feel for the trade off between this type of income vs the security of $ in the bank, if that makes sense.
I think I understand what you are looking for.

I'm trying to suggest that income isn't like $ in the bank - particularly rental income. It's simply not in the bank, and can change quickly due to the hyper-local nature of real estate and rentals.
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Old 02-25-2018, 02:36 PM   #9
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I'm curious how others have thought about home value as part of their asset pool for ER.... but for those retiring early with a family I would imagine downsizing at some point is part of the longer term plan.

In our case, our home would be about 25-30% of our net worth, so not insignificant. We have very young children... Fine at 50, but I would guess by 70 we would downsize into a more manageable, less expensive property.

And in a related question, we're looking at a property which is more expensive than we had initially budgeted, but that has a rental unit as part of the property. If you're clearing 25k of income from the rental, what's a reasonable tradeoff vs cash? Is it crazy to think of this as equivalent to $Xin the market?
Three paras, three answers from me:

- I don't count home equity as a retirement asset. We will always need someplace to live, and while we may downsize, that doesn't always mean a reduction in cost, thus I simply view it as an expense until the mortgage is paid off, then it's a smaller expense with respect to property taxes and HOA. It's possible sale of our home could be a windfall in the future, but I'm not counting on it as an ER asset.

- Our home equity is right around 25% of our net worth, but as mentioned, that number is somewhat meaningless to me. We also have a young child, maybe another on the way. Current home is fine for us +1 for all time, but another child would require a bigger home. THAT might drive us to downsize later, but as previously mentioned, that doesn't always mean savings.

- I can't think of something I would want to deal with less than a renter on my property. I think I'd feel like I was at work all the time. People talk about the rental income, and I'm sure it's nice and people make their livings off of it. It wouldn't be my cup of tea having to landlord for someone I can/have to see every single day. If you do it, you need to be exceptionally selective about who you rent to, IMO.

If you choose to do the rental, make sure you're thinking of all the costs right up front. Bigger Pockets has good calculators to show you just how much rent you need to charge to make something profitable, and it's more than you might think, especially in HCOL areas.
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Old 02-25-2018, 02:39 PM   #10
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I think I understand what you are looking for.

I'm trying to suggest that income isn't like $ in the bank - particularly rental income. It's simply not in the bank, and can change quickly due to the hyper-local nature of real estate and rentals.
Ah, yes, I see your point. But isn't that also the case for money in the market? In this case, given the area and the time horizon, I can't see it dropping to nothing, but 20-30% fluctuations are certainly possible. The hope is that we don't put ourselves in a position where we're forced to sell, but obviously that's never guaranteed...
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Old 02-25-2018, 02:52 PM   #11
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Nash, thanks for the bigger pockets link. I'll check it out.

For us, you could drive a truck through what we *need* and what we're looking at, which is part of the reason I think about it that way. That said, I have no doubt that in 20 yrs if our portfolio is strong we could easily find a way to *downsize* to a place in the same price range!

I've done the landlord thing and don't mind it at all, but DH is less keen on the concept. We're actually potentially more interested in trading a rent free apt in exchange for services, which adds a layer of complexity. The potential rent vs dollars we've budgeted for services is pretty comparable in this case.
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Old 02-25-2018, 03:08 PM   #12
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Ah, yes, I see your point. But isn't that also the case for money in the market? In this case, given the area and the time horizon, I can't see it dropping to nothing, but 20-30% fluctuations are certainly possible. The hope is that we don't put ourselves in a position where we're forced to sell, but obviously that's never guaranteed...
We all build our models and projections based on assumptions.

The stock market has been around a relatively long time. And in the long run, over a 30 year period, the market returns around 8% on average per year. That doesn't mean your portfolio will do the same, nor that the next 30 years will be like the historical average. It just gives you a reasonable number to put in your model.

Home values tend to increase at the rate of inflation. But that's an average, and just as they say "location, location, location" when purchasing a house, the value of a house is very, very local. The same is true for rental income.

I think I understand what you are hoping for. But if I read what you wrote correctly, your timeframe is simply too far out and with too many variables to make reasonable assumptions about the difference in value between the home you will be purchasing soon and a home you might purchase 20+ years down the road.

When I purchased my vacation/weekend/eventual retirement home it ended up being larger and more expensive than my primary residence. It just happened to be in the location where we want to spend the rest of our lives and we could afford it. That was 6 years ago. Since then, the values of both homes have increased a lot.

Now that we are nearer our full retirement, I have a better handle on the proceeds I can expect when I sell. We own our primary residence without a mortgage, while we still have 24 years remaining on the mortgage of our retirement home. While I could use the proceeds from our first home to completely pay off the second, I haven't yet decided that would be the optimal path.

In my planning, I plot two scenarios. In the first, I pay off our mortgage, and reduce our expenses. In the second, I keep the mortgage, and invest the net proceeds from the sale of our primary home. Both scenarios allow us to be "successful" in our retirement. When the time comes, we'll decide on one of the two paths.

I couldn't really have applied numbers to these two scenarios until recently. Even then, the housing market could change such that our primary residence sells for far more or far less than I am predicting. We would be fine in either case.

As for rental income, to me it just seems too hard to predict out that far. My brother-in-law rented out a portion of his home. I was stunned to hear how much he could get for what was basically a "basement". But it turned out that he was in the right location, and at the right time.

On the other hand, my sister's father and mother-in-law rented out a unit attached to their home for many years with a positive cashflow. Then the housing market in their locale changed and they had to drop the rental price by 40% after the unit was empty for many months.

In your models, you can make any assumptions you choose. Assume you can downsize and net 50% of the value of your property if you like. Assume your cashflow from your rental unit grows by your projected inflation rate forever, if you like. But all models with many variables and long timeframes tend to have wide ranges of end values. That's just the way they work.

I calculate Net Worth. But for retirement planning, I always used (Net Worth - Home Equity).
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Old 02-25-2018, 03:20 PM   #13
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I don't include it in my NW for withdrawal purposes. We're in a middle of the road market so it also doesn't make me drool with anticipation of a windfall.

If anything, the home creates a need to spend. I have to set aside about $6k a year on average for insurance and maintenance, both small (painting) and major (roof, HVAC).
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Old 02-25-2018, 03:23 PM   #14
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Our house is a small part of our net worth.

It will ultimately be traded in for downpayment on upscale long term care facility (I hope).

Basically - traded for another type of living situation.

I never count it as retirement assets.
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Old 02-25-2018, 03:39 PM   #15
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We're putting our house up for sale this week. Looking to downsize and pocket some "overflow" monies. If we get even close to the amount the agent says, we'll clear 100-150k in less than 3 years. Looking to "pocket" that and get something smaller and start over again. The current % of the house is appx. 30% of our NW.

Looking forward to the other little things to go down too, e.g. taxes, utilities, etc.
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Old 02-25-2018, 03:51 PM   #16
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We own three homes (free and clear) and treat them as insurance. They are part of our net worth/portfolio but at the moment they are expenses (property tax, utilities and maintenance). We are watching our parents to determine when we need to downsize. My in-laws are in their 80's and still living at home. My mother is in her 80's and moved into an apartment in an upscale retirement community about 18 months ago. One thing we have started to do is liquidate things we no longer need (books, documents, DVDs, VHS Tapes, electronics, LPs, clothes, household items). We started doing this after the long process we went through cleaning up a lifetime of stuff we had to liquidate fairly quickly before we moved my mother sold and moved out of the home she lived in for over 50 years.
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Old 02-25-2018, 04:52 PM   #17
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I don't include it in my NW for withdrawal purposes. We're in a middle of the road market so it also doesn't make me drool with anticipation of a windfall.

If anything, the home creates a need to spend. I have to set aside about $6k a year on average for insurance and maintenance, both small (painting) and major (roof, HVAC).
Is that figure based on a 1 or 1.5% of value type formula ?
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Old 02-25-2018, 04:55 PM   #18
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I've also got more house than I need, and at some point, maybe 15-25 years down the line, I'll likely downsize. I don't count it in my net worth, but rather know it's there as backup. If you want to treat the excess as part of your net worth, that's your business, but it's not what I do.

Regarding rental income, I don't know, I guess I'd think of it like part-time work income. It's not guaranteed cash since it can stop if you lose your renter and the rental market is weak in your area.
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Old 02-25-2018, 04:58 PM   #19
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We don't count it at all in the "base" of assets that we are pulling the 4% from (which is actually somewhere between 0% to 3.5% depending on year and other sources of side hustle income).

I do, however, include the house in my net worth on my balance sheet - it's a valuable asset that can be put to work. For example:
- cash out refi mortgage or HELOC
- rent part or all of it out
- sell and downsize
- sell and move to a nicer, newer but smaller and similarly priced house once the kids are out of the house
- reverse mortgage

My main way of accounting for a house for FIRE planning purposes is by keeping my budgeted expenses rather low since we get "free" rent (other than the $400/mo we pay for maintenance, insurance, taxes, etc).
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Old 02-25-2018, 06:19 PM   #20
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I consider my two houses to be long-term care insurance. I don't consider them in my portfolio withdrawal rate, other than when I decided to have no mortgage so I'm not forced to withdraw more than necessary and hit certain tax cliffs.

The value of the rental unit portion of that property would certainly be equivalent to $X in the market, and is providing diversification for your portfolio.


Ditto
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