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Re: Rethinking my approach -- comments?
Old 10-25-2004, 09:01 AM   #21
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Re: Rethinking my approach -- comments?

a home throws off rental income whether or not you are actually renting it out. *You simply consume the income rather than receive it in cash.

I agree that by living in a home you are consuming a portion of the gains it produces (by giving up the chance to obtain rental income from it). I don't think that you necessarily exhaust all of the gains generated by investing in a home by living in it. It is possible for a home to produce enough gains that you could both live in it rent-free and also obtain an increase in your net worth as a result of ownership of the home.
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Re: Rethinking my approach -- comments?
Old 10-25-2004, 11:12 AM   #22
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Re: Rethinking my approach -- comments?

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Hmmm, how can I explain this? *If your portfolio throws off interest and dividends which you consume, is it still producing income? *Of course. *In the same manner, a home throws off rental income whether or not you arer actually renting it out. *You simply consume the income rather than receive it in cash.
Brewer, this is perfect, as long as you are counting that implied rent as something you are indeed spending each year. *(at that point, you could also put the value of your home into your portfolio). *I suspect most of us would find our finances looked worse, not better, were we to do this. *I think it would come as a rude shock to see just how high our annual expenses were if we counted the value of our home's rent as an expense. The rough math on this is that annual rents are maybe 1/10 the value of a home, whereas your 4% SWR is 1/25th of your asset value, so you'd come out way worse by including home value in your portfolio and counting rents as an expense.


As a result, most of us just sort of ignore the whole topic, and keep homes out of our ER Portfolio, and imputed rents out of the annual budget.

My quibble is only if we start to want to 'have it both ways', selecting to view the home as an asset when it makes our finances look better, but choosing not to think about rent consumed and foregone since it would make us all feel like spendthrifts. *

I know your initial question was only about whether you 'have real estate exposure in your portfolio already as a homeowner', so am not implying you're doing anything wrong. *Just that this is a slippery slope, and if we want to be conservative in our personal accounting (which I think is essential for someone in ER, after all we're not working for a living so we had better know darned well what we are doing!) then it pays to be really clear and consistent on how we account for this major portion of our net worth.

ESRBob
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Re: Rethinking my approach -- comments?
Old 10-25-2004, 11:42 AM   #23
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Re: Rethinking my approach -- comments?

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Brewer, this is perfect, as long as you are counting that implied rent as something you are indeed spending each year. *(at that point, you could also put the value of your home into your portfolio). *I suspect most of us would find our finances looked worse, not better, were we to do this. *I think it would come as a rude shock to see just how high our annual expenses were if we counted the value of our home's rent as an expense. *The rough math on this is that annual rents are maybe 1/10 the value of a home, whereas your 4% SWR is 1/25th of your asset value, so you'd come out way worse by including home value in your portfolio and counting rents as an expense.


As a result, most of us just sort of ignore the whole topic, and keep homes out of our ER Portfolio, and imputed rents out of the annual budget. *

My quibble is only if we start to want to 'have it both ways', selecting to view the home as an asset when it makes our finances look better, but choosing not to think about rent consumed and foregone since it would make us all feel like spendthrifts. *

I know your initial question was only about whether you 'have real estate exposure in your portfolio already as a homeowner', so am not implying you're doing anything wrong. *Just that this is a slippery slope, and if we want to be conservative in our personal accounting (which I think is essential for someone in ER, after all we're not working for a living so we had better know darned well what we are doing!) then it pays to be really clear and consistent on how we account for this major portion of our net worth.

ESRBob
I hate to beat a dead horse, but I think you are still missing something here. If you include your home in your portfolio and "charge" yourself imputed rent when looking at your expenses, it make basically no difference. Why? Because even though you now are counting this "huge" rental expense, you also conveniently have an asset that throws off 10% or so of its value in the form of "income" and tends to appreciate over time.

This is all semantics, so I hope it is at least entertainig for some. I think that it is a bit more imllumnating to include one's home in any examination of one's financial position. For the FIREee, the inclusion of imputed rent in the expense base may be useful insofar as it underlines how much one is consuming in the form of housing. I've seen numerous posters mention that they have way too much house for their needs, but little to no recognition of what this is costing them aside from the odd mention of RE taxes or utilities.
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Re: Rethinking my approach -- comments?
Old 10-26-2004, 12:16 PM   #24
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Re: Rethinking my approach -- comments?

My home as an asset...

Its value has risen 30% in the past year.
It provides income to me by mitigating other costs, such as housing and storage
I can sell it, reinvest the proceeds in a muni bond fund, and live in a smaller rental property for roughly what the bond fund would pay in dividends.
It removes some of my money from stocks, bonds and other more liquid and volatile investments. Since I can choose the location and relative neighborhood and area dynamics and directions, I have some control of the properties valuations in the short to intermediate term (0-7 years). This removal of monies acts as a very low correlative asset class in my asset allocation. Its extremely unlikely that we'll have a long term down period in stocks and bonds where my homes value will also drop severely.

I guess if you bought a home in a depreciating or non-appreciating area, much of this benefit would be lost. The good news is as ER's, we can choose to live anywhere we want to, so I pick undervalued homes in undervalued areas that are looking up.
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Re: Rethinking my approach -- comments?
Old 10-26-2004, 12:33 PM   #25
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Re: Rethinking my approach -- comments?

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I guess if you bought a home in a depreciating or non-appreciating area, much of this benefit would be lost. *The good news is as ER's, we can choose to live anywhere we want to, so I pick undervalued homes in undervalued areas that are looking up.
That may work but it is also combining lifestyle choices with your investment decisions. What to do when they conflict?
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Re: Rethinking my approach -- comments?
Old 10-26-2004, 01:34 PM   #26
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Re: Rethinking my approach -- comments?

Uhh...deal with them or make another choice?

Same way you get to ER. You save, you invest, you make lifestyle changes. Nothing different here.

What I dont always get is why people will steadfastly stay with a choice when its disabling to something that they will appreciate far more.
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Re: Rethinking my approach -- comments?
Old 10-26-2004, 01:44 PM   #27
 
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Re: Rethinking my approach -- comments?

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What I dont always get is why people will steadfastly stay with a choice when its disabling to something that they will appreciate far more.
Don't follow you here. Obviously they made their choice. Do you have an example?
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Re: Rethinking my approach -- comments?
Old 10-26-2004, 04:38 PM   #28
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Re: Rethinking my approach -- comments?

In its simplest form, people who spend rampantly for stuff that doesnt really improve their quality of life, while wishing they could retire early.

In this context, someone who would keep living in their pre-ER mcmansion, or in the very expensive area they had to live in, in order to find and retain quality employment prospects.

After ER-ing, with many less expensive housing options, in much less expensive areas, that dont really equate to "poor quality of life"...people will still live in the big house near the big employers and lose sleep about whether they're ER will "make it".

For example, I sold my mcmansion, and moved to a less expensive area that offered good quality of life, and an appreciating housing market thats very likely to continue appreciating, and I only live 30 minutes from where I used to live if I ever feel like I'm "missing something".
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Re: Rethinking my approach -- comments?
Old 10-26-2004, 04:56 PM   #29
 
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Re: Rethinking my approach -- comments?

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In its simplest form, people who spend rampantly for stuff that doesnt really improve their quality of life, while wishing they could retire early.
Human Nature *- Live for the moment. Very easy to understand.

It is the same reason that 60% of the people in the U.S.A are overweight. Tell me how you feel after you've just consumed 7,000 calories?

The same reason that we have an H.I.V. crisis.

Sacrifice the moment for the future. Everyone has their vices.
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Re: Rethinking my approach -- comments?
Old 10-26-2004, 05:17 PM   #30
 
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Re: Rethinking my approach -- comments?

This discussion has be re-evaluating my rent vs buy decisions. I've been renting since I sold my house two years ago. Prices seem very high relative to mortgage rates, but my muni fund is only throwing off 3%.
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Re: Rethinking my approach -- comments?
Old 10-26-2004, 08:20 PM   #31
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Re: Rethinking my approach -- comments?

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My home as an asset....
OK, OK, I'm starting to weaken on this one. It just seems to make everything so easy if we get to 'count' the home, too. I'm wired up to think my ER finances are supposed to be nail-bitingly close and uncertain-- some sort of forced discipline, I guess. Wierd.

But as to your other point about the unlikelihood of having stocks, bonds and housing all go down together for a sustained period of time -- I assume that Osama and his boys are staying up late trying to figure out what combination of plutonium and rocket dispersion techniques could bring about precisely this result. They may never get it, but I assume they are working on it, which makes the risks somewhat higher.

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Re: Rethinking my approach -- comments?
Old 10-26-2004, 10:03 PM   #32
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Re: Rethinking my approach -- comments?

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But as to your other point about the unlikelihood of having stocks, bonds and housing all go down together for a sustained period of time -- I assume that Osama and his boys are staying up late trying to figure out what combination of plutonium and rocket dispersion techniques could bring about precisely this result. They may never get it, but I assume they are working on it, which makes the risks somewhat higher.
Osama is probably trying hard to stay alive on dirty portable dialysis, and I think his boys are busier trying to further disrupt U.S. aims in Afghanistan and Iraq. Surely they still want to hurt the U.S. on its own turf, but they wanted to and tried for many years before September 11, and now everyone's paying real close attention. If we are any less safe today than we were on September 10 then it is from new enemies and our own government more than from Osama, because we're all over his operations now. (Incidentally, September 11 wasn't the first attempt at flying a jumbo jet into a building, it was the fourth since 1974; two of the other three were U.S. people--Samuel Byck and Auburn Calloway--and U.S. targets--the Whitehouse and a FedEx sort facility; the remaining was the Armed Islamic Group trying to demolish the Eiffel Tower. Not to mention numerous other domestic mass murder events/attempts and natural disaster deaths; mass casualty is not a new problem and I doubt it's more dangerous today than it has been.)

At any rate I don't think the risk is enough higher to let it affect ER planning. If you're really paranoid then don't buy near big cities, government installations and symbols of American money and power. But then you should also probably avoid areas with hurricanes, earthquakes, tornadoes, dangerous heat, dangerous cold, floods, flu, crime and congested traffic, just to be sure.

If dirty bombs worry you more, then please let me know when you find a way to manage a portfolio to mitigate the risk.

Wow, something set me off. I guess I'm tired of all the things to be afraid of: terror, bad economy and everything else on the news. I relate to your fears; now that I am debt free I worry more about my money than when I was $27k in consumer debt. That shouldn't make sense, but I feel like I have more to lose now, and I keep having to kick myself to stop worrying. I sense you're going through the same thing right now.
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Re: Rethinking my approach -- comments?
Old 10-27-2004, 04:48 AM   #33
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Re: Rethinking my approach -- comments?

BMJ,
Yeah, actually I'm past the paranoid stage (living 25 miles out of NY was bad a few years back) but now just sort of have this gnawing sense that the world won't really be 'safe' (if it ever was), and just sort of live with it. Having assets (passively managed, no less) makes you realize you're in for the ride, whatever comes along.

Still, it is worth getting some perspective: think about what it must have been like to live in 1918 when the flu epidemic killed off millions, here in the US and elsewhere, or indeed to have lived in Europe during the Black Death plagues or just about any other time in human history when invading hordes, evil rulers, renegade microbes or natural disasters kept life short, nasty and brutish. (Basically most of human history). So by that measure, things look pretty darned good these days!

ESRBob

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