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Old 06-20-2010, 07:41 PM   #81
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Nope, I may have even over-valued ours at 9%. Using purchase price it's between 3 & 4%.
Operative word was many...
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Old 06-20-2010, 07:43 PM   #82
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For the analysis to have any meaning, the % of house to NW should be mark to current market (as best as possible). Otherwise, any comparisons across folks is apples and oranges.

I suspect as you imply that many of the low % are probably counting thier houses at original purchase price (thus making the % much lower).

Kind 'a like what Prop 13 does to property taxes as a % of current income over time...
No. From my earlier post, I used current market value, If I used purchase price, it would be about 7% of my NW.
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Old 06-20-2010, 09:27 PM   #83
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For the analysis to have any meaning, the % of house to NW should be mark to current market (as best as possible). Otherwise, any comparisons across folks is apples and oranges.
I suspect as you imply that many of the low % are probably counting thier houses at original purchase price (thus making the % much lower).
Nah, we marked to market too.

We couldn't afford to buy this place today. I'm not sure we could afford to buy our rental property again today, either, but we could sure put in the sweat equity.
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Old 06-20-2010, 09:45 PM   #84
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Nope - guessing current house sale price here as well. Purchase price back in '94 was $30k, but it then got six years and an open wallet. It needed a bit of help.
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Old 06-20-2010, 10:36 PM   #85
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...We bought a house a few months ago...

... But we intended to do some extensive remodeling...

... Long story short, 3 months later, it is clear that the remodeling is not feasible. We considered simply selling and starting over. However, we love the location and over half of the value of the property is land value plus outbuildings and other improvements other than the house. So we plan to demolish and build new on the land...
I guess if the land is of a unique value to the owner, such as offering a one-of-a-kind view of a seascape, a mountain or river view, one would not mind destroying the existing house on it to build one to his/her liking. But that seems quite radical to me. I would look for a substitute, meaning another parcel of land without a house to build on. But that's just me. Or perhaps I have not ran across or owned any property that has such a strong and unique appeal to me.
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Old 06-21-2010, 07:14 AM   #86
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I believe it is called regentrification. See Dallas Park Cities, where people by homes for the land value, or say $1,000,000 tear down the house, and build a $3,000,000 house. In this case it's not the view it's the location, and it is happening in most cities. Well, maybe not Detroit.
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Old 06-21-2010, 08:19 AM   #87
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In 1991. at the end of a real-estate bust, we bought a 1950s dump house in a very nice neighborhood in Austin. we spent the next 12 years completely renovating it. New kitchen, baths, roof, A/C, floors, windows, driveways, major landscaping. We sold it in 2005 and the new owners bulldozed it and built a McMansion.
Gentrification had happened. When we moved there, the neighborhood was UT professors, small business folks, and the like. When we left it was for the seriously rich, and that was one of the reasons we decamped. Another was property tax.
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Old 06-21-2010, 09:33 AM   #88
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New kitchen, baths, roof, A/C, floors, windows, driveways, major landscaping. We sold it in 2005 and the new owners bulldozed it and built a McMansion...
Poof!

My father/brother did the opposite. No non-essential improvements since 1970. Sold to be bulldozed last year.
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Old 06-21-2010, 10:22 AM   #89
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Our real estate represents about 10% of our total net worth (including the real estate). Each person is different though as we all place different emphasis on the usefullness of various things. IE would you rather have another $10k in annual income or another $250,000 in real estate? Probably depends on how much of each you already have? The real issue is how much income you can safely generate from what's left and does this meet you life style needs?
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Old 06-21-2010, 10:37 AM   #90
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Gentrification had happened. When we moved there, the neighborhood was UT professors, small business folks, and the like. When we left it was for the seriously rich, and that was one of the reasons we decamped. Another was property tax.
This is happening in areas of my city. At least a few years ago it was happening. Folks buying $400-500k houses on postage stamp lots, then tearing down and building mcmansions. Much larger buildable lots were available for purchase 3 to 5 miles away for $40-100k in a variety of neighborhoods that run the gamut of amenities and socioeconomics. Hopefully this trend continues and someone buys my house for $500,000 and tears it down!
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Old 06-21-2010, 10:44 AM   #91
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There must be some upper theoretical limit on "house as a % of net worth" to be likely to FIRE. Of course "it depends". Just as an example, it may be around 50%. A quick rule of thumb is that it costs 1% of the house value each year to maintain your house. Larger houses and nicer neighborhoods lead to larger maintenance expenses. Maybe say 1% of the value a year for property taxes (this varies widely I assume). Throw in a little insurance, say 0.3% of the house value. So it will run you 2.3% of the house value to maintain, insure and pay taxes. If your house is 50% of your net worth, then the other 50% would be your portfolio. If you have a 4% SWR, then 2.3% of it goes to pay for your house and the remaining 1.7% is what you get to live on for everything else.

Obviously this is a generalization, but at some point as the house to NW ratio increases, the likelihood of successfully FIREing decreases. Using the other assumptions I have here regarding house expenses, the maximum house to NW ratio is 63.5%. That is, upkeep costs on the house exactly equal your 4% SWR. But a realistic house to NW ratio is obviously less than that.

Clearly, not counting pensions or SS in your NW will reduce the size of the denominator in the house to NW ratio, hence allowing you to get by with a larger house to NW ratio.
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Old 06-21-2010, 10:49 AM   #92
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In 1991. at the end of a real-estate bust, we bought a 1950s dump house in a very nice neighborhood in Austin. we spent the next 12 years completely renovating it. New kitchen, baths, roof, A/C, floors, windows, driveways, major landscaping. We sold it in 2005 and the new owners bulldozed it and built a McMansion.
Gentrification had happened. When we moved there, the neighborhood was UT professors, small business folks, and the like. When we left it was for the seriously rich, and that was one of the reasons we decamped. Another was property tax.
Where was it? Out near Mt Bonnell somewhere? Just curious.

One of our office buildings was on Shepard's Mountain overlooking the Loop 360 bridge. What a view. We had enormous MacMansions on a ridge high above us. Enormous houses - but so big on their lots that they hardly had any space between them.

What would amuse me the most what how the vultures liked to perch on their huge chimneys - LOL! Nice!

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Old 06-21-2010, 11:25 AM   #93
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I guess if the land is of a unique value to the owner, such as offering a one-of-a-kind view of a seascape, a mountain or river view, one would not mind destroying the existing house on it to build one to his/her liking. But that seems quite radical to me. I would look for a substitute, meaning another parcel of land without a house to build on. But that's just me. Or perhaps I have not ran across or owned any property that has such a strong and unique appeal to me.

This is common in Florida where a lot of the houses with great views are older and outdated so they get bulldozed for the land or some of them destroy the house partially and rebuild since this helps the tax basis .
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Old 06-21-2010, 12:10 PM   #94
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Where was it? Out near Mt Bonnell somewhere? Just curious.

One of our office buildings was on Shepard's Mountain overlooking the Loop 360 bridge. What a view. We had enormous MacMansions on a ridge high above us. Enormous houses - but so big on their lots that they hardly had any space between them.

What would amuse me the most what how the vultures liked to perch on their huge chimneys - LOL! Nice!

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Tarrytown. Between 15th and 35th streets, Mopac and the lake.
It was our American dream house. Lower class boy proves he has made it by living in snazzy 'hood. Oops. Learned the meaning of pretension.
We owned the house free and clear, but the ~2% property taxes were awful. The rent for our present 2 bdrm apartment in a similarly nice, but even better located 'hood is only a tiny bit more than the taxes were on that house 5 years ago. The couple who bought our house are paying $27K prop tax this year on their McMansion.
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Old 06-21-2010, 12:19 PM   #95
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Tarrytown. Between 15th and 35th streets, Mopac and the lake.
It was our American dream house. Lower class boy proves he has made it by living in snazzy 'hood. Oops. Learned the meaning of pretension.
We owned the house free and clear, but the ~2% property taxes were awful. The rent for our present 2 bdrm apartment in a similarly nice, but even better located 'hood is only a tiny bit more than the taxes were on that house 5 years ago. The couple who bought our house are paying $27K prop tax this year on their McMansion.
Yeah, I figured it was west of Mopac in that area. We lived just outside the city limits near 620. Our property taxes never exceeded $4K. Of course we only lived in a $150K house!

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Old 06-21-2010, 12:35 PM   #96
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I guess if the land is of a unique value to the owner, such as offering a one-of-a-kind view of a seascape, a mountain or river view, one would not mind destroying the existing house on it to build one to his/her liking. But that seems quite radical to me. I would look for a substitute, meaning another parcel of land without a house to build on. But that's just me. Or perhaps I have not ran across or owned any property that has such a strong and unique appeal to me.
Keep in mind that many of the "best" lots in many areas were built on years ago, for the same reason they are attractive now- easy access, best views, easy to build on, etc. Subsequent building took place on progressively less desirable lots- further away, no views, difficult terrain, etc.

We're actively looking for a fixer-upper waterfront home on the Olympic Peninsula- if it turns out to be a tear-down, that's OK with us, as long as the numbers make sense.
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Managing the risk.
Old 06-25-2010, 01:38 PM   #97
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Managing the risk.

For me the considerations are just a matter of perceived risk. I think the point can be illustrated best hypothetically.

House cost: $500,000

Average yearly maintenance and taxes on owned property that would otherwise be included in rent: $10,000

Renting the same house (or similar quality / size) : $24,000

Your (or your asset manager's) ability to generate consistent cash flow through investments*: 5% = $25,000 pre-tax return on the value of a house you own or are considering to buy.

So depending on how someone thinks about the situation, answers will start to change. If they are comfortable with the performance of non-real estate assets and it yields an after-tax return that combined with the property maintenance burden is higher than the rental costs for an equivalent quality place to live then the answer is rent. If this weren’t the case (it certainly isn't for me) then it would make more sense to buy.

I wrote perception of risk because all assets fluctuate. It's how you feel about those fluctuations that may also color your decision. If an non-housing asset that you relied on to produce the return that paid for your rent becomes worthless, it could effect ones housing situation. The nice thing about owning a fully paid off property is that there's much less that can happen to day to day life even with drastic fluctuations.

When thinking about how I would react if I found out one day that my home was worth 1/2 of what I had paid for it, I wouldn't care so much. It doesn’t change the fact that it is a happy home, I am in no rush to sell it and it continues to serve a wonderful purpose. On the other hand, if I was renting and rent money came from a dividend generating portfolio and some dividends got cut in an unstable economy, I could see myself worrying some... or lots.
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Old 06-27-2010, 04:31 PM   #98
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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.
"A house is not an investment?" . "It's an expense?."............ Hmmmm? I purchased my lakefront home seven years ago for $150K and it recently appraised for $350K (and it's paid for). I can fire sale it tomorrow for $250-300K, and realize at least $50K in clear profit after all taxes, expenses, etc. Assuming I die first, my DW can also reverse mortgage the house if she wants added income. Or we can sell it and use the assets to rent or buy a small non-waterfront condo etc.and put $150 to $300K in the bank.....yet you consider it an 'expense'...Interesting.
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Old 06-27-2010, 04:34 PM   #99
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"A house is not an investment?" . "It's an expense?."............ Hmmmm? I purchased my lakefront home seven years ago for $150K and it recently appraised for $350K (and it's paid for). I can fire sale it tomorrow for $250-300K, and realize at least $50K in clear profit after all taxes, expenses, etc. Assuming I die first, my DW can also reverse mortgage the house if she wants added income. Or we can sell it and use the assets to rent or buy a small non-waterfront condo etc.and put $150 to $300K in the bank.....yet you consider it an 'expense'...Interesting.
My house, on the other hand, has appreciated maybe $40k in the last ten years. I've done about $40k worth of upkeep/improvements, so...

But I'm building equity!
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Old 06-27-2010, 04:53 PM   #100
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Here's a "back of the envelope" analysis for someone who owns a paid-off house:

If we assume a 4% SWR and use the old rule of thumb that housing costs should be about 1/4 of gross income; and futhermore assume that property taxes, insurance, and maintenance run about 2% per year of the house's value, we get about 33% of net worth (including the house).

liquid net worth = $1,000,000

4% SWR = $40,000

1/4 of SWR = $10,000

Value of house = $10,000 / 0.02 = $500,000

$500K / 1500K = 33%

Of course, someone living in a state with high property taxes would get a different result.
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