Percentage of net worth tied up in house

[kevink]

We sold our last house during the beginning of the economic meltdown and were lucky to come close to breaking even. Have been traveling and living abroad since, but would like to put down roots and are living in a small city where rentals tend to be pretty trashy.

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. Historic annual appreciation in the very recession-resistant small city where we live (where the biggest employers are prisons - 13 of them - a growth industry in tough times) has been 6%, but the recession has caused a few years of negative returns even here (prices are at about 2007 levels) so it seems like a decent time to buy. I'm not expecting anything better than 3% appreciation, but then again I'd be happy with double that rate in my investment portfolio.

Any thoughts?

 

[kcowan]

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

The return to 6% APR on RE is likely around the corner but might still be a few years away. IOW the costs of waiting in minimal.

 

[W2R]

I like owning my house free and clear. It is a nice, solid house, in a nice neighborhood, and more than big enough for me. It was really comforting for me to have no mortgage payment or rent to pay during the economic collapse.

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 guess my present home represents less than 15% of my net worth. But that is just me, and each to his/her own - - there are plenty of people with more than that in their homes and if they are happy, then that is the right choice for them.

 

[REWahoo]

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 guess my present home represents less than 15% of my net worth.).

My thoughts and my numbers are very similar.

 

[scrinch]

Our home (free and clear) is now about 20% of our net worth. When we paid it off in 2002 it was about 30%. So I guess I didn't mind 30% then. This is in California where home prices are relatively high.

 

[Tesaje]

Mine is paid off too and is probably about 30%. Not really by design. I think it is substantially worth more than I paid for it still. But then again, I won't know for sure until I sell it.

I tried to stay within the old rule 25% of income when I bought.

 

[IndependentlyPoor]

We just decided to continue to rent for another year. We like living within walking distance of downtown Austin, but do not want to shell out the nosebleed prices for a condo here.

Condos were available at the upper end of our price range, but the association fees and punitive Austin property taxes queered the deal.

Also, we just couldn't bring ourselves to sell 20% of our portfolio. Maybe we are becoming miserly.

 

[ziggy29]

Not ER'd yet but our house represents less than 15% of net worth (and it's paid for). That, of course, will allow ER to get here that much sooner.

 

[bbbamI]

Both ER'd for over a year. Our mortgage free home is about 11% of our total net worth. If we moved, we'd stay at that percentage or less.

(Pension and future SS are not figured in our total net worth)

 

[LARS]

I think that an analysis based solely on % can be misleading, especially when a house is purchased for cash.

The more absolute dollars you have, the greater % I think you can comfortably invest in housing.

For example, it is one thing to put 30% of your net worth into a house when you are worth $5 million than if you are worth $ 1 million. To my mind, while the %s may be the same, there is a big difference to having absolute cash reserves of $3.5 million vs. $0.7 million.

 

[HFWR]

Home not paid off; the equity represents ~12% of NW. If if was free and clear, it would be about 26%.

 

[REWahoo]

Also, we just couldn't bring ourselves to sell 20% of our portfolio. Maybe we are becoming miserly.

Or conservative - although I know that term is a dirty word in Austin...

 

[IBWino]

Our house is not quite paid for, but it will be between 15% and 20% of our net worth when I hopefully retire in 5 years. We live in a relatively expensive area in Northern California and currently plan to live here until we die, or heaven forbid, no longer can take care of ourselves.

 

[IndependentlyPoor]

Or conservative - although I know that term is a dirty word in Austin...

Onward through the fog!

 

[73ss454]

I also like owning my house free and clear and plan on staying here till the Grim Reaper shows up. Now, if I can only get the value down more so my taxes will drop.

 

[inkitnow]

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.

There are, of course, emotional reasons to own - you want to create your own personalized space, decorating, the ability to add on, change, paint etc. You can also lock in your expenses whereas rents may rise.

My advice? If you want to own, buy small, have no mortgage and minimize maintenance costs. Then spend your money on other things that make you happy.

 

[Purron]

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. The condo is in a very desirable area and has held it's value even during the downturn. More importantly, she loves living there.

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.

Naturally, the higher your net worth, the lower the percentage an average home would represent. If you don't have a pension and rely on your net worth to generate retirement income, best to keep the percentage lower. Plus, the younger you are the longer your net worth has to sustain you.

 

[Purron]

One other thought...a primary residence is not counted as an asset in determining medicaid eligibility. This could serve to protect some net worth if one spouse ends up needing long term care.

 

[kevink]

Some great comments here; thanks everyone! For me, Keith, WTR and REWahoo's comments resonate especially since we are at the younger end of the range and have a much smaller nest egg than many who post here.

I ran the numbers and we're looking at tying up 12-13% in this house, which meets our rather hard-to-find criteria: it's 3 BR/1.5 BA, newer (mid-60's), low maintenance (new steel siding and roof, double pane vinyl windows, ultra low energy use), 1100 sq. ft, minimal yard maintenance and of course cheap.

There's really no way to know in advance if this will end up being cheaper than renting, but with pretty conservative estimates of future appreciation (2-3%) and rent increases (3%+) in our area it looks like buying will pretty much a wash with renting within a year or two. In our particular city it means much higher quality of life than any rental we could find: we'll be easy biking and walking distance from downtown, parks, tennis courts etc. The other thing that finally made the decision for us is rents to house values here are fairly high, while property taxes are extremely low (.5%) due to their being subsidized by fees for a major tourist attraction here that is city-owned.

Thanks again for all the great feedback~

 

[HFWR]

Onward through the fog!

Love it!

And before anyone gets their thong in a twist, I'm a libertarian, and find rabid liberals and rabid conservatives equally annoying...

But Austin, and Texas, has lots of good music!

 

[FUEGO]

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.

 

[LARS]

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!

 

[kcowan]

I wonder when "means testing" will include all the means. It seems like an obvious step for our cash-strapped governments.

 

[DeborahB]

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.

 

[Westernskies]

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...