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How I Established my Net Worth WITH my House in it
Old 10-25-2010, 08:50 AM   #1
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How I Established my Net Worth WITH my House in it

I know, another discussion on net worth and the house...should it be included or not?

Funny I started reading posts about this (on this and other pages) and still could not get an answer I felt comfortable with. So this is what I've done and soliciting comments on it.

First, my mortgage free house was recently appraised at $750k for the purpose of a secured line of credit (which is not used) that I can borrow 75% of the value. I do not plan selling it at this point or within the next 5 years. Beyond that...who knows.

IMO, to not use any of its value in calculating our net worth is simply wrong. So what I decided to do, is to use the remaining value of the house if we were to downsize to what I feel would be the type of house and value that at this time would be suitable. That houses value would be about $300k, leaving $450k to add to my Net Worth total. I then reduced it by $50k to cover the costs involved with moving (legal & real-estate fees, etc).

So my Net Worth is + $400k with the house. To me, that feels right.

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Old 10-25-2010, 09:06 AM   #2
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Quote:
Originally Posted by e86s54 View Post

... To me, that feels right.

E86S54
That is why there are so many ways to do 'net worth' calculations. Since there are many reasons for doing them, people modify the method to suit their purpose.

If you are planning for retirement, the focus is on assets from which income can be derived. If you are estate planning (or settling an estate), you often want a liquidation value.
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Old 10-25-2010, 09:17 AM   #3
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Originally Posted by rgarling View Post
That is why there are so many ways to do 'net worth' calculations. Since there are many reasons for doing them, people modify the method to suit their purpose.

If you are planning for retirement, the focus is on assets from which income can be derived. If you are estate planning (or settling an estate), you often want a liquidation value.
That's really a summary of the whole issue. The question "how are you using the net worth metric?" informs how you prepare the net worth metric.

I don't include the house in the portfolio value I stick in firecalc (my house produces no income and isn't invested). I include it in my total net worth (assets minus liabilities) calculations, because it is an asset encumbered by a liability.
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Old 10-25-2010, 09:17 AM   #4
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If you have firm plans to downsize and know the approximate cost of your new home, AND DW agrees, your approach sounds sensible to me. Does this make a big difference in your net worth?

Edit: After reading the previous two posts, I assume that you're using this net worth as the basis for SWR calculations in the future (ie. for the time after you sell your home)
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Old 10-25-2010, 10:27 AM   #5
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Originally Posted by walkinwood View Post
Edit: After reading the previous two posts, I assume that you're using this net worth as the basis for SWR calculations in the future (ie. for the time after you sell your home)
That is an important issue. If you figured you would sell sometime in the future but used the equity in the number you use to calculate SWR now you could substantially screw up without a lot of analysis about the place of specific real estate in a portfolio. It would seem that your risk on a single home holding its value (or increasing) is a lot different than that of a REIT.
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Old 10-25-2010, 11:11 AM   #6
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Originally Posted by FUEGO View Post

I don't include the house in the portfolio value I stick in firecalc (my house produces no income and isn't invested). I include it in my total net worth (assets minus liabilities) calculations, because it is an asset encumbered by a liability.
Ditto.
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Old 10-25-2010, 11:21 AM   #7
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Quote:
Originally Posted by e86s54 View Post
I
First, my mortgage free house was recently appraised at $750k for the purpose of a secured line of credit (which is not used) that I can borrow 75% of the value. I do not plan selling it at this point or within the next 5 years. Beyond that...who knows.

++++

So my Net Worth is + $400k with the house. To me, that feels right.

E86S54
Net worth is like a balance sheet in accounting - a snap shot at a particular time. So, if you were to calculate your net worth every 12/31 you would include the market value of your house less the mortgage - no selling costs.

If, you were doing financial projections you would do something akin to what you are doing.

If feeling right is what you are after, do what makes you happy or sad; depending upon what you are after.
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Present Value of Imputed Rent Stream
Old 10-25-2010, 11:33 AM   #8
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Present Value of Imputed Rent Stream

The value of your paid off house is exactly the present value of the imputed rent stream of payments over your lifetime.
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Old 10-25-2010, 12:47 PM   #9
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Originally Posted by FUEGO View Post
I don't include the house in the portfolio value I stick in firecalc (my house produces no income and isn't invested).
My house may not produce an income, but since it is paid off, I no longer pay rent...that in itself could be viewed as income. Or to flip it around, I sell the house, realize the gain that I can plug into firecalc (as per your thinking) and pay $3k/mth rent to the new owner. What's the difference?

Also, in my area, housing has been relatively stable for decades and has kept up with inflation, so to a certain point it could also be viewed as an investment as its value has been growing tax free.

Lastly, we are unlikely to live out our current lives in this house and will sell eventually. Just no plans at the moment.
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Old 10-25-2010, 12:57 PM   #10
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Originally Posted by e86s54 View Post
My house may not produce an income, but since it is paid off, I no longer pay rent...that in itself could be viewed as income. Or to flip it around, I sell the house, realize the gain that I can plug into firecalc (as per your thinking) and pay $3k/mth rent to the new owner. What's the difference?
Well, if you sell the house, add the amount to your portfolio value and then run FIREcalc, you will also need to increase your withdrawals by approximately $36k per year to account for your increase in spending due to having to pay rent (minus other amounts you would pay on a mortgage free house - like taxes, insurance, maintenance, etc).

Clearly this scenario is distinguished from the scenario where you don't have a rent payment, but also don't have the freed up capital from sale of the house.
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Old 10-25-2010, 01:26 PM   #11
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I don't see a problem is conservatively adding the difference in home value after a significant downsize like the OP mentions. I don't include the value of my home because it's only worth $40K at most so there is no downsizing.
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Old 10-25-2010, 01:44 PM   #12
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One of the problems with the question.... like most of these.. is WHY do you want the number


Like others have said, if you just want to know your 'net worth'... then a house is included at FMV etc. etc.... the thinking of a balance sheet comes to mind...


If you want to determine your 'liquid assets'... then you do not use it..

If you want to determine 'how much money will I have to live off when I retire'? Then what you are doing is the way to go... again, with the caveats that you actually sell the house and use the gain to live in the future...


One of the problems that my boss has is he has a lot of gain tied up in his land.. probably a couple of million... but I asked him one day about his retirement and he does not want to get rid of the land... so, he needs CASH in order to retire... sure, he could live really well if he did not want to live on such a large piece of dirt...
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Old 10-25-2010, 01:57 PM   #13
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The value of your paid off house is exactly the present value of the imputed rent stream of payments over your lifetime.
The imputed rent stream *after* accounting for taxes, insurance and maintenance, I'd say.
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Old 10-25-2010, 02:46 PM   #14
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I only include real and personal property in schedules that accompany our wills. Can't eat the porch or the cars.
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Old 10-25-2010, 03:48 PM   #15
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That is an important issue. If you figured you would sell sometime in the future but used the equity in the number you use to calculate SWR now you could substantially screw up without a lot of analysis about the place of specific real estate in a portfolio. It would seem that your risk on a single home holding its value (or increasing) is a lot different than that of a REIT.
Seems like if you were fairly conservative about estimating the house value that would be ok. I have some stocks in my portfolio that don't produce income either, and they could be a lot higher or lower when I go to sell them. For many, or certainly for me, the dot.com bubble bust was a LOT more severe than the housing drop.

Plus, if the existing house value drops, it should be offset somewhat by a lower cost of replacing that house with a smaller one.

The difference is that you can diversify stocks easily, but not your house. That's a big single asset. You'd have to think about how to consider it in your asset allocation plan.

I also have a house much larger than I need, but rather than consider it's value (less replacement) in my SWR, I consider it my cushion in case things really go bad.
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Old 10-26-2010, 01:41 PM   #16
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We currently rent, so this is the reverse perspective.

We might consider buying somewhere after FIRE. At that time, the plan is for the budget for the purchase price of that home to be our annual rent divided by a fictional SWR - the "fictional" bit coming from the fact that a proportion of our income will be in the form of pensions.

An alternative could be to budget to pay a chunk, say 2/3 if 2/3 of our income is from the portfolio, of the purchase price determined by 2/3 of our annual rent divided by our real portfolio SWR, and get a mortgage for the rest, whose monthly repayments would be 1/3 of our monthly rent, to be repaid from the pension.
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Old 10-26-2010, 04:18 PM   #17
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We currently rent, so this is the reverse perspective.

We might consider buying somewhere after FIRE. At that time, the plan is for the budget for the purchase price of that home to be our annual rent divided by a fictional SWR - the "fictional" bit coming from the fact that a proportion of our income will be in the form of pensions.
This is a bit abstract for me, but it seems that if for example the assumed SWR were 4%, you would be willing to pay up to a 25x home to rent ratio. That's with no allowance for prop taxes, insurance, upkeep or any HODs. A 4% cap rate on gross rent.

No wonder it is so hard to find a SFM or small multi that would pay a landlord to own it, other than speculating on inflation.

A few weeks ago there was an article, I think in Forbes, that listed the 20 highest sales price to rent ratios in US cities. Manhatten was highest, Seattle 2nd, and I think number 20 had a ratio just above 20x. Seattle was up there only because rents are relatively low, not because selling prices are extremely high, though they are high enough but many standards.

With today's very low mortgage and interest rates, one can pay up a little on this ratio, as long as you won't want to sell someday. Because buying what the median buyer can afford at 4.25% is going to very different from selling to that same buyer at 8%.

Ha
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Old 10-26-2010, 05:26 PM   #18
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This discussion got me thinking about our particular situation and how it has morphed over time.

When I first found this site and began doing practice calculations of SWR, I owned a house (that I lived in) and a property here in Paradise that I rented out. Both properties were paid off by the last time I ran any SWR calcs. The house on the mainland was worth 1/3 of the property here. So, to begin with, I calculated my net worth (for SWR purposes) as excluding the mainland house value BUT including the property where I live now (I've actually traded that property for another several miles away - but that's another story). I felt it legitimate to consider the "income property" in my SWR calcs. because, after all, it did produce income. To be sure, it wasn't my typical "best performing" investment, but it was quite consistent. It also provided fantastic "growth" income over the years of ownership which sort of adds to the irony I'll describe.

When I got serious about selling the mainland house and moving to the house in Paradise, it suddenly occurred to me that my NW (for SWR calcs.) was about to take a big hit. The property I didn't consider as part of my SWR calc. was about to become a chunk of cash - easily converted to investment suitable for calculating part of my SWR. Conversely, since I was moving to the "income property", it would no longer be producing income (in the traditional sense) and I could no longer consider it in my SWR calc. It was sort of a "Back to the Future" space-time-continuum paradox.

This is essentially the reverse of the OPs situation. I had to think about it for a while as I knew I would be moving to a more expensive state and I had just taken an SWR pay cut! The good news (as a belt and suspenders guy) was that I'd built in enough slack that the lowered SWR could be accommodated. As a true FIRE "newbie" at the time, the irony of the situation took some getting used to.
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Old 10-26-2010, 08:02 PM   #19
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I never care about the values of my homes, but if the market goes down again like 2008-2009, I may have to think about converting that amount into gallons of gasoline to fill my RV. Considering that we have had a thread in the past on Tumbleweed houses with 100 sq.ft., my class C motor home with 200 sqft is like a heaven on wheels. One travels light, goes to interesting places, meets interesting people. Where's the drawback?

Downsizing to 100 square feet of bliss

PS. Wonder if I will need to drag my wife out of the house, with her still clinging to the drapes. Hmm... Must continue to work on persuasion.
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Old 10-26-2010, 08:14 PM   #20
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Originally Posted by BigNick View Post
We currently rent, so this is the reverse perspective.

We might consider buying somewhere after FIRE. At that time, the plan is for the budget for the purchase price of that home to be our annual rent divided by a fictional SWR - the "fictional" bit coming from the fact that a proportion of our income will be in the form of pensions.

An alternative could be to budget to pay a chunk, say 2/3 if 2/3 of our income is from the portfolio, of the purchase price determined by 2/3 of our annual rent divided by our real portfolio SWR, and get a mortgage for the rest, whose monthly repayments would be 1/3 of our monthly rent, to be repaid from the pension.
You may find this article interesting when you're thinking of buying
http://www.nytimes.com/2010/04/21/bu...leonhardt.html
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