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Old 06-17-2010, 10:29 AM   #21
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Our house will be in the 10-15% of net worth range when we hit our FIRE target amount. Right now it is 31% of our net worth, although it is encumbered by a mortgage, so the equity in the house is only 14% of our net worth. Moderate cost of living area in the Southeast US, but we live in a well below median priced neighborhood for our urban area.

Just a few other thoughts: owning a house gives you "imputed rent income" that isn't taxed. Renting requires you to get the money to pay rent from somewhere. If it is from withdrawals from tax advantaged accounts, interest from bonds or CD's, or cap gains from selling appreciated assets, you are paying tax on that income. Not sure if you are looking forward to taking advantage of the government health insurance subsidies in 2014, but these implement an effective additional marginal tax rate of 15-18% roughly on top of ordinary income tax (ie your subsidy decreases as your income increases). I'm planning on owning just to keep my income needs lower and get me some highly subsidized health insurance.

One of the big challenges facing ER'd people is inflation. Owning a house locks in most of your housing cost. There will still be inflation for housing costs (taxes, insurance, maintenance, repairs, etc), but the capital cost is fixed.
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Old 06-17-2010, 10:38 AM   #22
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I'm planning on owning just to keep my income needs lower and get me some highly subsidized health insurance.
This is a good point; and one of the reasons I question all the talk about means testing SS (sorry to hijack thread).

Means testing will simple force folks (certainaly at the margin) to change their financial behavior to lower current income. Buying a bigger than necessary house to "shield" income is just one example.

Me, I'm going to buy a Picaso... and worry about any gains when I finally sell it, but busily collect SS up until that day!
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Old 06-17-2010, 11:41 AM   #23
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I wonder when "means testing" will include all the means. It seems like an obvious step for our cash-strapped governments.
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Old 06-17-2010, 11:49 AM   #24
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I don't see it as tying up money in a house - we wanted a large house so we could both pursue various activities (which required room). I wanted a great kitchen (and got it). The house is almost paid for - I'll pay off my small mortgage when I am eligible for Medicare (my healthcare costs will go down and I probably won't be able to itemize taxes any more).

I don't see it as a portion of my net worth - I don't see it as an asset since we don't intend to sell. We need a place to live.

As a $ of my net worth - probably 25% but as I said, not relevant for me.
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Old 06-17-2010, 03:41 PM   #25
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I don't see any FINANCIAL reason to own a home now. You certainly can't call it a good investment and making money on it is uncertain, at best, unless you look out 25 yrs.
Well, unless you consider the 60% of my net worth that I made from buying and selling homes. (Primary and Second), this figure not including the one I am in now. That's a pretty good financial reason for me to own a home, and on the whole, nearly all of mine have worked out to be good investments- one small land purchase notwithstanding... Basing a long- term investment strategy on a quick snapshot doesn't make a lot of sense to me. Besides, ya gotta live somewhere...
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Old 06-17-2010, 07:30 PM   #26
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~10% for me. I have always shied away from being house poor.
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Old 06-17-2010, 07:40 PM   #27
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I would look at price/rent ratios and see if there is anything suitable. With the guideline that 1/3 of your family income should devoted to RE, you can quickly figure what to spend on rent.

For example, with a 4% SWR, and a portfolio of $1 million, then $40k would be your budget and $13000 would be for rental or carrying costs. YMMV

....
Rent is 30% of my expenses.
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Old 06-18-2010, 01:43 AM   #28
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Personally I would balk at living in a location where a paid off house that I liked would represent more than 20% of my net worth.
I don't anticipate my house will ever be as little as 20% of my net worth. I expect that by the end of the year, (457 balance + Roth balance) will pass (house price - mortgage), but only because the appraised value of the house has declined by almost 1/4 since 2006.

I don't really have any significant assets other than my house and retirement accounts. Well, maybe my car, but it's losing value by the minute, just sitting in the garage! After retirement, my house will be less expensive than where I live now, and paid off—but even so, I'll be pleasantly surprised if my portfolio amounts to four times its value. Only if I included such things as the present value of Social Security and pension payments would the house's fraction of the total get down into the 10-20% range mentioned in other comments. OTOH, I also don't expect the house to be over half of my net worth, like Purron's mom's condo.

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The correct amount to have in RE is dependent upon many factors. About 60% of my mother's net worth is in her paid off condo. (snip)
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Old 06-18-2010, 06:35 AM   #29
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Paid off RE is about 50% of my NW. Kids take care of 1 house DW and I do the condo. Works out. Not worried. The other 50% now thats a worry.
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Old 06-18-2010, 07:26 AM   #30
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This thread peaked my interest because since DW and I have been married (38 years) we have lived at 14 different addresses. 90% of these were houses and 50% of the address changes were due to being transferred by megacorp. Made money on every house we sold and this satisfied one of our goals when we married, which was to build up equity in real estate as a basis for retirement. We successfully accomplished this goal. I just calculated value of real estate at 59% of net worth; however, part of that 59% is tied up another house that is in the process of being sold. When that sale is closed we will stand at 40% of net worth tied up in real estate. Both properties are owned free and clear which accomplished one other goal which was to have our retirement home paid for.
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Old 06-18-2010, 08:49 AM   #31
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I own a studio apartment in a large co-op complex. Its value is about 9% of my net worth. I paid off the mortgage in 1998 so all I pay is the monthly maintenance, about half of what market rentals would be around here. But like others have posted, I don't see it is part of my overall wealth.
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Old 06-18-2010, 09:14 AM   #32
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I wondered if any others out there who are frugal ER's or ESR's have a formula (or maximum) for how much of one's total assets are tied up in a home.
A house is not an investment, it's an expense. Housing affordability is really what percentage of budget, not assets, is acceptable. Not sure there is a rule of thumb here. I would ask: will you gain more satisfaction by allocating more disposable income to housing (more sq ft, different location, etc) or to other lifestyle expenses such as travel, restaurant, etc.
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Old 06-18-2010, 09:26 AM   #33
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A house is not an investment, it's an expense. Housing affordability is really what percentage of budget, not assets, is acceptable...
I agree. Some of us are happy in a nice home, and some rather spend money on travel. As long as it makes us happy, who's to say what's right? And then, we may also change our mind as we age time progresses.

So many ways to pursue happiness, heh heh heh...
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Old 06-18-2010, 09:29 AM   #34
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House and land value is about 5% of NW.
However, I am not using that value as part of the portrfolio value used to determine yearly income in retirement, since I will not take 4% of the house value as income.
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Old 06-18-2010, 09:32 AM   #35
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A house is not an investment, it's an expense. Housing affordability is really what percentage of budget, not assets, is acceptable. Not sure there is a rule of thumb here. I would ask: will you gain more satisfaction by allocating more disposable income to housing (more sq ft, different location, etc) or to other lifestyle expenses such as travel, restaurant, etc.
I agree that a house is better viewed as an expense. This is especially true for retirees in that you might never sell it, so potential capital gains will remain unrealized. But when you are renting and considering a house purchase you must decide what percentage of your liquid, income generating investment portfolio to convert into an illiquid, expense generating house.

It seems complicated to me. Equivalent rent, lost income from the investment assets sold for the house, maintenance, liquidity, inflation, real estate taxes (a very big deal where we live), personal autonomy (not dependent on others for repairs and maintenance), and income tax considerations. Makes my head hurt.
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Old 06-18-2010, 09:52 AM   #36
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It seems complicated to me. Equivalent rent, lost income from the investment assets sold for the house, maintenance, liquidity, inflation, real estate taxes (a very big deal where we live), personal autonomy (not dependent on others for repairs and maintenance), and income tax considerations. Makes my head hurt.
I myself am too lazy to compute the budget as precisely as most people here. I survive so far, finger crossing, by underspending (there's that LBYM philosophy again), and if I am wrong, well, I may have to work a bit harder on my part-time work.
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Old 06-18-2010, 09:58 AM   #37
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It is indeed complicated. Crunching the numbers made my head hurt too. Whether renting or owning you have to make many assumptions, including investment rate of return, annual % rent increases, inflation scenarios, etc. I found the "advanced" version of this "rent vs. buy" calculator helpful:

Is It Better to Buy or Rent? - Interactive Graphic - NYTimes.com

For us, as ESR's the take-away was that it made sense to buy a small house in our particular ultra-low property tax town. Almost anywhere else we would have chosen to rent indefinitely.
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Old 06-18-2010, 10:08 AM   #38
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I agree that a house is better viewed as an expense. This is especially true for retirees in that you might never sell it, so potential capital gains will remain unrealized. But when you are renting and considering a house purchase you must decide what percentage of your liquid, income generating investment portfolio to convert into an illiquid, expense generating house.

It seems complicated to me. Equivalent rent, lost income from the investment assets sold for the house, maintenance, liquidity, inflation, real estate taxes (a very big deal where we live), personal autonomy (not dependent on others for repairs and maintenance), and income tax considerations. Makes my head hurt.
Reminds me of what went through when I was considering buying a place instead of renting 21 years ago. Even though I worked with numbers, it made my head hurt. Even though my new mortgage+monthly mantenance charges on my co-op apartment cost a lot more than my old rent, after I netted out the tax reduction from mortgage interest and property taxes the amounts were about the same. And I would be building equity. And.....I had a lot of control over the mortgage part of my housing expense (unlike rent). A few years later, I was able to refinance it and save a chunk of money. A few years after that, I paid the rest of it off. Can't do that with rent.
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Old 06-18-2010, 10:22 AM   #39
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My paid off house is about 15% of my NW. I decided to buy instead of rent 29 years ago strictly so I could own dogs, and in that respect it has worked out well. I would have done much better financially renting and investing the difference, but I still consider it a good decision.
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Old 06-18-2010, 01:36 PM   #40
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I wondered if any others out there who are frugal ER's or ESR's have a formula (or maximum) for how much of one's total assets are tied up in a home. Having all our assets liquid as we do now feels both liberating and scary. I can see value in owning a small place free-and-clear.
Any thoughts?
Hawaii real estate is unrealistically expensive, so our home amounts to over 30% of our net worth. One reason is that we bought it 10 years ago at the pit of the last real-estate recession. Another reason is that we've poured in quite a bit more sweat equity plus some cash. But that beats working for a paycheck or trying to pick stocks. Hawaii also beats living in more "affordable" places like Dubuque or Minot.

Like starting a family, I think owning a primary residence is, um, primarily an emotional decision. Control, privacy, convenience/inertia, and family are at least four factors more critical than financial gain. The burden of depreciating possessions is another emotional factor in not owning a home.

One investor in Michael Lewis' "The Big Short" immediately sold his Bay area home when he realized its appraised value. His anecdotal thumbrule was to buy when real estate was selling for less than 10x its annual rent and to sell when it's over 20x the annual rent. I'd never heard that before and I haven't tracked down the reference. However both of our houses' ratios are bumping up into the high teens.

I compare our rental's cash-on-cash return to long-term CD rates to decide whether landlording is a brilliant idea or whether it sucks. (Right now it sucks less than owning long-term CDs.) However even landlording is fraught with emotional considerations because we view our rental property as a potential age-in-place primary residence. Another triumph of emotion over financial logic.
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