ER, home value and net worth

[Finance Dave]

We plan to downsize, but move to a higher-cost housing state...so even though we get less house, we will pay about the same...so we don't count it.

Currently 2,750 sqft main level with 1,300 sqft basement (mostly finished), estimate it's worth about $430k

Will move to about 2,200 sqft with no finished basement or no basement at all...but probably will spend a bit over $400k

Take out the realtor fees for selling and moving costs, and it's a wash for us.

 

[Katsmeow]

I don't consider my home part of my investment assets and don't consider it part of my withdrawal rate. However, it is part of my net worth and I count the equity in it as such. That said - downsizing may or may not result in a less expensive house.

We did one cut of downsizing about 7 years ago. At that time, our housing costs did go down. We moved from a very large, expensive house to a smaller property. We still had some kids at home but not as many as before. Anyway, that downsize cut our housing related costs about in half.

However, we are about to downsize again now that the kids are entirely gone. This may not help us much with housing costs because of where we are moving to. We will indeed be moving to a smaller house probably 25% to 33% the size of what we have now. So, yes, I expect to have lesser utility and maintenance costs. However, this smaller house will probably cost about the same as what we are selling our current house for and may cost a little more (maybe 10% more). So, in that sense and in terms of property taxes our expenses may go up a little.

When I first started thinking of downsizing again I assumed the new house would be less money. But, when I looked at what we really wanted in terms of location it really doesn't work out that way for us.

 

[W2R]

[...]However, this smaller house will probably cost about the same as what we are selling our current house for and may cost a little more (maybe 10% more). So, in that sense and in terms of property taxes our expenses may go up a little.

When I first started thinking of downsizing again I assumed the new house would be less money. But, when I looked at what we really wanted in terms of location it really doesn't work out that way for us.

I ended up paying more for a smaller house too, although it does have a large detached garage that isn't included in the square footage. I am in a much nicer neighborhood than before, in a 1500 sf home instead of 1600 sf. But the selling price was 119% of the selling price for my prior home. Now that doesn't sound bad, but when you consider all the costs of moving, closing, inspections, repairs, my landscaping project (gargantuan trees removed, jungle of bushes removed, regrading, new topsoil, sodding, concrete work, etc), and so on, the final amount was 149% of what I got for my prior home.

SO worth it, though! I hope your dream home will make you as happy as mine has made me. Just living here still adds joy to every day.

 

[Yarnstormer]

I don’t include mine in my net worth and like others think of it as a long term care resource. It will be paid off by the time I need care hopefully - now worth approx $250k. If I had concrete plans of downsizing I might think differently.

 

[gayl]

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.

+1000

 

[RobbieB]

I count my house in my net worth. I consider it as a "bond" type investment. It reduces my expenses (compared to renting) and yeah, you need to live somewhere eh?

 

[rodi]

I technically count my house in my net worth - since that is how net worth is defined.

But... Like most others here I do not consider it in my 'portfolio' that I use for determining withdrawals/spending/etc.

Home is paid off. We have a detached rental unit on the same parcel. (Granny flat). Rental income has netted 17% of our annual spending. Home expenses are much lower (thanks in part to Prop 13.) Home represents about 35% of our total net worth.

I would not buy a place with a rental unit - we built it as a solution to the increased needs of my in-laws... to give them privacy and their own space, but still be able to offer support. That is no longer needed and we were fortunate to get great tenants. The income is definitely part of our budget - it helps keep my WR nice and low (<3%).

We will probably downsize to a less expensive place in the future just so we can "lock and go" travel. We'll have to completely evaluate it to make sure that the loss of income is fully accounted for.

 

[USGrant1962]

You asked how this fit in with a proposed 3.5% SWR. I'll note that historical SWR studies have only looked at financial market assets, not direct real estate holdings. So the best way to look at landlordship is to probably consider it an ongoing income stream that reduces your needed portfolio withdrawal. And then you can liquidate if you need to. But don't forget the caveats that folks here have mentioned about variability of real estate markets, rents, and occupancy. Of course such variance applies to equity and fixed income markets too.

But that is more of an in-retirement issue. If looking at retirement a few or more years out, your investment in rental properties is certainly part of your investment portfolio. You can expect both capital gains and dividends (rent minus expenses) in the long term, which will provide the assets needed for ER.

 

[NW-Bound]

My 2 homes are 21% of my networth. Used to be a higher percentage, but the portfolio growth has been better than home appreciation.

Together, their operating costs consume 30% of my living expenses, computed over the last 8 years since I started to keep data.

For simplicity, let's say that the homes are about the same in value, and require the same in annual expenses.

Then, if I sell one and invest the proceed, my investable assets will increase to 113% of the current value. My expenses will reduce to 85% of what they are. This means my WR will reduce to 75% of the current WR.

Or I can use that 25% for something else. Something to think about.

 

[davebarnes]

I include our house (personal residence) at the same value in our net worth as my socks.
You need to live somewhere and you need to keep your feet warm.

 

[NW-Bound]

Both homes and socks may be overrated.

One can sell both, and go live barefoot on a sailboat in the Caribbean.

Not a choice for me, but many have done the above.

 

[daylatedollarshort]

If I had to do it over again I would have bought a smaller house - no more than 3 bedrooms and 2 bathrooms. Downsizing sounds like a good plan but the reality is it is a lot of work to declutter and fix up a big house to sell, and you might not want to leave your neighbors and neighborhood when you are older. Bigger houses usually cost more to insure, upgrade, heat, cool, repair, furnish, pay property taxes on, etc.

 

[dd564]

How people calculate their funds from which they withdraw is fine and left up to the individual.

As far as counting property as part of your net worth, I think you're doing yourself a disservice to not count it.

The value of owning bigger / more property has a strong impact on one's personal wealth. To ignore that would be counterproductive I feel.

 

[Meadbh]

The standard accounting definition of Net Worth is Assets minus Liabilities. Therefore I always include my home equity in my Net Worth. However, my investable assets, and the numbers on which I base my retirement decisions, do not include my home. As a LBYM single person, I have never bought “too much house”. If I move again, it won’t be to downsize, and I might very well end up buying a more expensive home. In the event that I need long term care, I can sell my home to help pay for it, but I am not counting on that.

 

[brucethebroker]

It helps to use two definitions, IMO. Your investable assets and your net worth. I think many people on this form consider home equity part of their net worth, but not their investable assets.

When planning your retirement, think of the income you can generate, not asset base. If you have a rental that returns a net of $1,000 a month, you will need less 3%-4% withdrawal money, right? (In essence, $1,000 a month in rentals, is worth $250k at 4% withdrawn, if that helps).

Our rental property returns a net average of just under 7%, not including tax benefits. As a result, we do not need as much in assets as a 4% withdrawal type scenario.

And you can use this same thinking when putting SS retirement benefits or a part time job into the mix.
Focus on the income you need in retirement, and work from there.

 

[DrRoy]

I don't include it in my NW for withdrawal purposes.

+1. It would be 6% of NW if I did. I do not count it in any way.

 

[DEC-1982]

I consider my two houses to be long-term care insurance.

I never thought about this till now but it's a very good point.

 

[Car-Guy]

In my case our home sits on many acres of country property. So the property is more valuable than the house and I do count both it in our total NW. Although it is less than 10% so it really doesn't matter that much to me.

Personally, I never agreed that someones primary home should not be included in their NW calculations. I've heard many arguments (e.g. you have to live somewhere) but I still feel it's part of a person NW. You could sell it and rent, or sell it and downsize and invest the extra money in something else, or setup a reverse mortgage, etc. That's just my opinion and YMMV.

 

[Meadbh]

Personally, I never agreed that someones primary home should not be included in their NW calculations. I've heard many arguments (e.g. you have to live somewhere) but I still feel it's part of a person NW. You could sell it and rent, or sell it and downsize and invest the extra money in something else, or setup a reverse mortgage, etc. That's just my opinion and YMMV.

It’s not just your opinion. It’s Generally Accepted Accounting Practice (GAAP).

 

[Meadbh]

It helps to use two definitions, IMO. Your investable assets and your net worth. I think many people on this form consider home equity part of their net worth, but not their investable assets.

When planning your retirement, think of the income you can generate, not asset base. If you have a rental that returns a net of $1,000 a month, you will need less 3%-4% withdrawal money, right? (In essence, $1,000 a month in rentals, is worth $250k at 4% withdrawn, if that helps).

Our rental property returns a net average of just under 7%, not including tax benefits. As a result, we do not need as much in assets as a 4% withdrawal type scenario.

And you can use this same thinking when putting SS retirement benefits or a part time job into the mix.
Focus on the income you need in retirement, and work from there.

I quite agree, except that my calculation suggests that $1000 per month in net rental income is equivalent to $300,000 of invested capital at 4% withdrawal.

I have invested about $120,000 in rental properties over the years. I am paying off the remaining mortgages at a pace that gives me a neutral cash flow. Once the mortgages have been paid off, the properties will generate a steady income of approximately $20,000 per year. Assuming a 4% withdrawal rate, to match that I would need $500,000 of invested capital. The difference between that and my original investment is mostly leverage, i.e. using other people’s money (OPM).

 

[JoeWras]

I choose to run my personal accounting more conservatively than GAAP. I am not a public corporation, so I can do that.

Ask GE how their aggressive accounting worked out for them...

 

[CRLLS]

For what purpose should a personal (not rental) home be included in "net worth" used? Certainly not for investments. I think while we are living, it is only an indicator, with no real application. With one exception. When planning our demise, real Net Worth should be tallied and use to decide how to title homes and cars etc to avoid probate. Think Living Trusts. Beyond that, Net Worth has no real meaning IMO.

 

[phil1ben]

I am of the opinion that this question and any answers are largely dependent on net worth. It would only be useful for the OP to compare people with similar net worths and ages.

For example, lets take an individual with a net worth of 30 million who owns personal residences worth 10 million. That person would have 20 million of investable assets and 33% of net worth represented by personal residences. However if one has a net worth of 3 million and owns personal residences valued at 1 million the percentage (33%) would be the same but 2 million in liquid assets would probably not be acceptable.

Just my opinion.

 

[pb4uski]

Ditto with many others here... not considered part of retirement funds or in calculating withdrawals or our WR... but part of our net worth (net of encumberances).

And similar to others... it is part of Plan Z for LTC.

 

[stepford]

My rationale for including home value in my NW:

When ER'd I took $100K out of savings and paid off my mortgage. Regardless of whether one considers this a sound financial decision, I don't think most would say my net worth declined by $100K when I did so.

Alternatively those who don't count their home as part of their net worth but do carry a mortgage should be subtracting the current balance owed from their NW just to be consistent. I prefer the former approach.