Percentage of net worth tied up in house

[Meadbh]

~10% for me. I have always shied away from being house poor.

 

[CuppaJoe]

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.

 

[kyounge1956]

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.

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)

 

[BUM]

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.

 

[JOHNNIE36]

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.

 

[scrabbler1]

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.

 

[MichaelB]

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.

 

[NW-Bound]

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...

 

[theloneranger]

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.

 

[IndependentlyPoor]

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.

 

[NW-Bound]

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.

 

[kevink]

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.

 

[scrabbler1]

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.

 

[CyclingInvestor]

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.

 

[Nords]

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.

 

[JOHNNIE36]

If you read my earlier post you will probably come to the conclusion that I have way too much of our NW tied up in the house; however, we are willing to pay the price to make sure we are in a neighborhood we like and enjoy, not having little kids running all around and throwing junk in the yard, cars up on blocks and everyone doing their own oil changes, reving engines while being tuned up, wild a** parties with left over beer bottles in the morning and the value of your house going down hill because some idiot won't maintain his. Sorry, but I've been down that road. At 74, I don't need that kind of trouble. So, moved to an area where we don't have to worry about this kind of stuff. In our case, this required more outlay for the house; however, we are willing to spend more to get this life style.

 

[kramer]

It is difficult to make a comparison based on Net Worth because many people have income streams that, if capitalized, would raise their Net Worth substantially.

That being said, I will give you the perspective of a "pure" ER -- That is, single guy, mid-40s, with no income streams (except Social Security in 25 years) just liquid assets.

My plan is to hopefully buy just ONE place in my lifetime (I have never yet owned, nor do I plan to do so in the near future). That means I need a lot of familiarity and comfort with the location where I would buy, and would buy only for the long term, and pay cash.

I would have to say that my maximum comfort level now would be something like 8% of net worth. If I were 60, within 10 years of Social Security and fewer years of life expectancy, I might raise that to something like 12%. These numbers would have to include initial furnishing and startup costs, also.

Kramer

 

[kcowan]

...
My plan is to hopefully buy just ONE place in my lifetime (I have never yet owned, nor do I plan to do so in the near future). That means I need a lot of familiarity and comfort with the location where I would buy, and would buy only for the long term, and pay cash.

I would have to say that my maximum comfort level now would be something like 8% of net worth. If I were 60, within 10 years of Social Security and fewer years of life expectancy, I might raise that to something like 12%. These numbers would have to include initial furnishing and startup costs, also.

Kramer

Ironically, we rent NOTB because the price/rent ratios have been out of sight for over a decade.

But we bought in Mexico for 8% of our net worth. We also sublet our NOTB place while we are in Mexico so its net cost is about 0.4% a year. ultimately, we might leave our NOTB place and just travel in the summer but we are not ready for that yet.

 

[NW-Bound]

I remember participating in a thread where people talked about their RE value(s) as a percentage of their net worth. I can't seem to find that thread now.

For me, even with 2 houses, the RE portion is less than 1/2 of my portfolio. This means that my homes together are less than 30% of my net worth. This percentage is perhaps a bit higher than some people here, but still lower than that of many Californians.

 

[ScottFromUtah]

If I'm retired, can live off my pension and SS, the %age of my net worth tied up in my home doesn't mean anything, does it?

In my case, I own two homes outright, and together they are ~40% of my net worth. So what? If I need the money, I will sell one of my homes.

Is there something I'm missing?

 

[LARS]

For those that are under 10% of NW in a house you either (a) live in a very low cost area or (b) you have one helluva NW. On the coasts, near big cities, "nice" homes are at least $700,000 and more like $900,000 to $1,000,000 at a minimum, which translates to $7 to $10 million Net Worth.

Either way good for you!

 

[Rustic23]

Ours is close to 50%. However, this is of no concern. We depend on pensions and SS for our income, so the house represents an abnormally high percentage. If I converted the pensions to present values, the this percentage would go down considerably.

 

[Purron]

Ours is close to 50%. However, this is of no concern. We depend on pensions and SS for our income, so the house represents an abnormally high percentage. If I converted the pensions to present values, the this percentage would go down considerably.

Yup. Your pension and SS if converted present values would dilute the percentage you hold in RE for sure. If it's working for you, that's great. Keep on keeping on. The point is to be secure and enjoy your life. Sounds like you're there Rustic.

 

[Katsmeow]

Figuring out the percentage for me is difficult.

We bought a house a few months ago. If I just considered that cost (and not the income tax on money we had to withdraw from retirement accounts to pay for part of it), then it would have been about 14% of net worth (actually a little less). But we intended to do some extensive remodeling so that percentage will go up.

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.

This will result is a much higher percentage of net worth tied up in house. I know what our net worth would be if we hadn't bought the house.

Figuring out how much is tied up in it is complicated. If we do demolish and build a house is it what the new house would sell for? Is it what we paid to buy the house and then build the new house? If it is the latter do we include the income taxes paid on the money we take out of retirement accounts to pay for it (I tend to think not since we would have paid taxes on the money eventually any way). Using our cost (but not including taxes), the percentage will be about 35%.

I did fairly extensively look at firecalc and my spreadsheets and long time budget to decide whether what would remain would be adequate to support our needs.

 

[Emeritus]

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. ....

She's 80 and receives a generous government pension (old CERS) and social security (from her 2nd husband). She has no worries about health insurance and has long term care insurance. I think she's in fine shape financially.

Actually to answer the question correctly you have to calculate the Asset value of the pension to make the comparison, or alternatively use the imputed income of the house. Assume for the purpose of discussion a 60 year old single person owns stocks and a home each worth a million and an inflation protected pension and social security giving $60,000 a year. The pension is worth substantially more than either the house or the stocks. Th person has about a third of their assets in each of equity, real estate and inflation protected fixed income.