do you count your house as the RE part of your allocation?

[astromeria]

I don't count my house value except in a sort of theoretical way. Like everyone points out, ff we were to sell, we'd either buy something else or rent. And unless something bad happens to us financially, the replacement house/retirement community will cost about the same as the value of the current house. If we switched to renting, we'd hopefully have the wherewithal from the sale to provide the additional income we need to cover rent and moving expenses.

Two couples we know sold their homes locally last year and started renting, in both cases for the flexibility to spend a lot more time with their children & grandchildren up north, and also for the men to get out from under yard and home maintenance--both had health events that contributed to their decisions (heart attack, prostate cancer).

-- Couple A cleared ~$450k from their house sale, and now has $2000/month rent on a pretty townhouse where they can now walk to most errands and have a shorter drive to downtown Charleston. They got rid of one car, but also moved out of their golf community.

-- Couple B traded a small mortgage for a $2300/month seasonal house rental in downtown Charleston--they cleared ~$550k on their house sale.

Both couples enjoyed a hearty run-up in their house values over ~10 years, both couples have reliable pensions that provide (I'm guessing-) ~ half their living expenses, and both are happy with to the decisions to buy when they did and sell when they did.

 

[laurence]

If you own your home free and clear, and your total payment each month is a couple hundred bucks in property taxes, and renting the equivilant home in the neighborhood costs $2,000, there is some value in that. I'm willing to entertain arguments that one shouldn't claim the full market price in your net worth, but I think you should take the difference between rent and property tax and figure out what lump sum you would need for an annuity to pay you that, or something like that.

My parents are selling their house in Coastal San Diego and bought ten acres in the foothills to build their dream home on and put a couple hundred thousand in the bank to boot. I'd like to see a renter do that.

 

[donheff]

I am not sure about what the argument is. I am typical of most of my - home owning - peers. My mortgage and property tax may have been a bit higher than renting an equivalent house in the early days, but it very quickly became much cheaper than rent as prices (and rents) rose. Now I am living in a rent free house that I can pass on to my heirs or tap with a reverse mortgage in case of emergency. If I had rented the entire time, I would not have been able to save more and I would have to rent for the next thirty years of retirement. Case closed.

 

[brewer12345]

I'm getting a vibe that a smallish REIT portion would not be bad. House is in Italy but all investment accounts are in the US for numerous reasons. Matters are complicated as I earn dollars but am spending euros. That introduces a wild card that can effectively vary my 'earnings' by as 40-50%, taking the past several years of exchange rates into consideration (!)    Euro at .85 => 1.32; now 1.20 or thereabouts.

For me buying was preferable to renting since I knew what I was paying at a fixed point in time (versus the spectre of paying euro rent with an ever-plummeting dollar). Also, renting the type of property we have would be more expensive relative to the purchase price than would have been the case for a 'normal' apt.

brewer, thanks for the references to commodities and foreign bonds. I will check those out.

now as far as REITs go, I'm not sure how to go about evaluating.. is there an REIT fund or ETF? Or is it better to pick a couple individual ones?

Holy cow do you have a big currency mismatch! Assets in USD, spending/liabilities in Euros. <shakes head>

delfina, I think it would be a very good idea for you to hold a reasonably sizeable weighting of euro-denominated bonds. GIM has a hefty european weighting, but they also have a lot of asian bonds. Might be worth looking around to see if you can find a bond fund that concentrates on euro-denominated bonds. Either that, or periodically spend a little money on call options on the new Euro etf that was recently put out there. That way you are hedged if the USD really takes a beating vs. the Euro.

I don't think REITs are the bargain they once were, but having at least some in your portfolio would be a good idea. If you have access to it, I think highly of VG's REIT fund (VGSIX). If not, ICF (an etf) is a decent choice.

 

[Ed_The_Gypsy]

ladelfina,

Vanguard has an REIT index fnd, VGSIX.

Gillette Edmonds, author of "How to Retire Early and Live Well with Less than a Million Dollars" has a web site:

http://theretiredinvestor.com/how_to_retire_early.htm

where he once had investment information on REITs. I haven't looked at it carefully lately. You might look for yourself.

Cheers,

Ed

 

[mathjak107]

whether it counts depends on the ground rules of what others are doing in the survey..a house can be excluded if others are not counting it in there figures and all agree not to count anything that is not something that you can not convert to cash at this point in time... ...if you never sell the house it only counts when figured as part of yourt estate...you cant swap your house if your living there for a different asset group like a true "investment" if economic climate exists..i think net worth is sometimes defined as anything that can be converted to cash at that moment if desired...if you want to sell your house now well count it,if your not ready to turn it into cash dont count it yet......same would be true of fine art,,,if you wheel and deal art work as an investment count it...if your not parting with your favorite erte' painting dont count it..while it may have value to you its more a personal possession at that point than an investment.

 

[Martha]

We live in a four unit building owned by us. It is mortgage free and is an income producing asset. If I want a true financial picture of where we are at, I include the building as part of our net worth, but should include a hypothetical rent as an expense.

If we were to sell the building we would either have to convert some of the value to a non-income producing asset (a home) or pay rent.

The funny twist on this is the reverse mortgage. Because of the availablity of reverse mortgages, you can turn your home into an income producing asset.

 

[mathjak107]

a reverse mortgage is a liability no matter how you figure it..

 

[cute fuzzy bunny]

I cant imagine any way of figuring a reverse mortgage as a liability. You own an asset, the reverse mortgage pays you monthly while reducing the ownership of the asset until your death or the sale of the home, when the asset converts to ownership by the mortgager (unless the residual value exceeds that of the amount paid).

At no point do you owe money if you're alive and still residing there and until you die or sell the home, there is no loss of the usability of the home as shelter.

You've, as martha said, turned the home basically into an annuity or a cash stream for a period of time.

This is akin to putting 200k into a money market and taking a fixed amount out every month. At some point that asset is zeroed, but its never a liability.

 

[mathjak107]

a reverse mortgage is an outstanding loan..if you arent ready to sell the house...you cant claim a 400,000 dollar asset (the home) and a 400,00 reverse mortgage giving you cash and then add the 2 together for a net worth of 800.,000....the reverse mortgage is really no different than an outstanding equity loan ..only difference is the manor in which its paid back.... net worth is assets minus liabilities........even as far as drawing income, for every dollar you get in income on a reverse mortgage you loose a dollar of equity unlike a true income property where you dont loose value for every dollar of income...

 

[cute fuzzy bunny]

Huh...you argue that a painting you dont intend to sell shouldnt be considered an asset, but a loan you dont have to pay is a liability.

Whatever works for you.

 

[mathjak107]

Re: do you count your house as the RE part of your allocation?
« Reply #35 on: Today at 09:08:33 AM »

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Huh...you argue that a painting you dont intend to sell shouldnt be considered an asset, but a loan you dont have to pay is a liability
the paintings are not having money deducted from their value because of an outstanding loan...the home is having the outstanding loan value deducted from its equity....kind of like a margin account

 

[cute fuzzy bunny]

Like I said, whatever works for you.

 

[Craig]

I agree with Martha et al.

Frankly, this has always seemed a bit of a silly discussion to me. Our rental homes are an investment, but our own home is not ... or a liability? If we move into one of our rental homes, all of a sudden it's not an investment?

Strikes me as an argument akin to "does a tree make a sound when it falls in the forest and no one is around" ... or, "is a man wrong, even when a woman is not around"?

Reality is real. Our homes are investments, as well as a portion of our consumption, and Martha puts it well.

For us, our task is to keep growing the non-real estate portion of our net worth, as our real estate portion is too large, but tax considerations make liquidation foolish, IMHO.

 

[donheff]

We live in a four unit building owned by us. It is mortgage free and is an income producing asset. If I want a true financial picture of where we are at, I include the building as part of our net worth, but should include a hypothetical rent as an expense.

If we were to sell the building we would either have to convert some of the value to a non-income producing asset (a home) or pay rent.

The funny twist on this is the reverse mortgage. Because of the availablity of reverse mortgages, you can turn your home into an income producing asset.

It seems to me that net worth is an end-of-game concept (i.e., what's left if I die). So for net worth you don't need to figure in rent - no rent when you are dead. In other words, rent is not a liability you deduct from your net worth. A mortgage is, however, because your estate would have to pay it off in one way or another. Another way to think of it is that expenses are irrelevant to net worth, debt is not.

Asset allocation, on the other hand, is a game-is-on concept (i.e., what's the best way to secure an income while I am still alive). It seems to me that equity in a personal residence or second home could be considered part of the allocation mix if you plan on tapping them for income if needed (e.g sell the second home or reverse mortgage the primary). I think of my paid off weekend home as an asset I will likely sell when I get older since I don't think I will want to maintain it. So I count it as real estate and evaluate the risk in terms of the sellability in likely future scenarios. If on the other had, I would prefer to keep the weekend house and pass it on in my estate, I would look solely to other investments for income while alive and would need to determine how best to allocate them to assure the income I want.

Needless to say, despite being able to decide what class to put my house in, I still can't come to a satisfactory conclusion about what is the most sensible asset allocation. The risk equation keeps bouncing around with every doomsday or boom article I read :-( (I can't get these icons to work in Firefox)

Don



Don

 

[Nords]

I don't care much about GAAP for this situation. I think there's only two times when this question has relevance:

- Will the lawyer who's suing your pants off consider your house an asset or a liability?

- How will the divorce lawyer treat your house? If your ex-spouse gets it then it's an asset. If you get it then it's a liability.

 

[Martha]

It seems to me that net worth is an end-of-game concept (i.e., what's left if I die). So for net worth you don't need to figure in rent - no rent when you are dead. In other words, rent is not a liability you deduct from your net worth. A mortgage is, however, because your estate would have to pay it off in one way or another. Another way to think of it is that expenses are irrelevant to net worth, debt is not.

Of course you are right. But if I include our four-plex as an asset when determining what we can withdraw from our "portfolio", I need to assume rent as a possible expense because the fourplex might be converted to another type of income producing asset, but we will then need to pay rent as an expense.

I know this situation is uncommon. But it helps illustrate underwhat circumstances may a home be included not only in your net worth, but as part of your "portfolio." Another example would be when your home generates cash via a reverse mortgage.

 

[mathjak107]

like i said before net worth is measured in cash....unless of course of death,divorce or assets counted towards a loan...if some thing is ready to be sold or can be readily sold at this very point in time its an investment...if if its not ready to be sold or cant be sold its personal property ..be it a painting ,rare coins,the home we live in....if the item is something we need to live on or in its not an investment...it may be an investment one day when it moves out of the personal property area and goes up for sale....my origional artworks are not for sale at this time.i would not count them as an investment...my rare road bikes are not for sale ,they are personal property at this time....just because somethings rare or valuable dosnt make it an investment or part of an allocation plan...we wouldnt count our jewerly or diamond ring as part of our precious metals portfolio....

 

[cute fuzzy bunny]

If you say it three or four more times, your opinion might become fact!

 

[mathjak107]

maybe ill even believe it myself ha ha ha

 

[ladelfina]

Many thanks to brewer and Ed the gypsy for some suggestions on diversifying into foreign bonds and REITs...

Sorry that somehow the hoary "renting vs. owning" issue has reared its ugly head.. Not my fault!  

I have a LOT of individual stocks (33 stocks and 9 funds) and am trying to get a handle on asset allocation a la Bernstein. I need to go slow not to incur too many capital gains for no reason, so I'm trying to see what I can do with my 7% cash that will enhance the mix. Hence wondering whether REITs fit or not, given a large home equity. That's all.

Someone with an identical net worth but who rents will be using their income from all sources to cover their housing expenses; a sample allocation might have 10% in REITs... Let's say our renter is has a $1MM portfolio, $40k income and is paying $1200/mo. in rent ($14,400/year).

Now switch to the homeowner. Let's give him an income of $25,600 (what the renter has left over after rent).  He's got a portfolio of $640,000 to throw that off. And he's got a $360,000 house (or less, 'cause we have to take into account prop. taxes & expenses, so let's low-ball those and say $700,000 portfolio and $300,000 house). If the owner has no REITs or other real-estate investment other than his house, he's still at 30% RE versus the renter's 10%.

It is true that you are not going to perceive the total value of your home until you sell it. It's also true that you won't perceive the total value of ANY of your investments until you sell them.

• Sell home => get $ => use $ to buy another home or start paying rent.
• Sell investments => get $ => use $ to buy more investments or...??

• Keep house => get 'income stream' equal to fair market rent without having to pay taxes on it (except in Italy and other weird-ass socialist places). House could appreciate or could lose value.
• Keep investments => get income stream with which to pay rent, etc. Investments could appreciate or could lose value.

A lot of things we 'spend' money on are 'investments' of some kind, even if they are poor ones. Buying a lottery ticket is an investment with an average return of .000001%. But if I buy a couch instead of going to Rent-A-Center, is that not a decent investment (like people's references to annuities, above) that will pay me back over time in 10 or 15 years of "couchitude" (or couchiness, or couchation), putting me ahead of the couch renter?

And to answer mathjak... I damn sure do have in the back of my mind that my jewelry could be used to raise cash in a pinch (think stranded somewhere in an emergency). I also don't see why rare coins couldn't be sold.. Ok, my house might take a month to sell, but it can't be an investment because it's less liquid? Are annuities and hedge funds liquid? Does that make them 'not investments'? Just like your bikes, my stocks are currently not for sale, btw..

---
The many "rent vs. own" discussions haven't been likely to have changed anyone's mind on the matter. Home ownership and renting each have a lot of lifestyle benefits and lifestyle hassles that are going to make or break that decision for most people; they're not going to feel differently about what suits them unless the financial benefits of one or the other are gigantic, which they aren't.

Looking at it that way (home 'investment' or lack thereof is a fixed decision, non-negotiable) I suppose I will indeed choose to put some RE into my investment portfolio asset allocation mix, since it's that subset on which I'm operating, and of which I'm concerned about reducing volatility. As others have already noted, volatility of the value of the house you live in is not a concern if you are not planning to sell.

Thanks for the insights, everyone! 

 

[JB]

Your original post indicates that you understand the issue.

When I finally paid off the mortgage I assumed that the income stream I needed to live on was lower. I also increased my stock/bond allocation since I used lower yeilding bonds to pay.

The thing to watch out for is assuming your house is an investment asset and at the same time using the lower income stream the house affords you in your FIRE calculations.

Ooops, I read your post above thinking it was the original. Good summary!

 

[tryan]

I 've always figured the house is part of the net worth since it will be tapped eventually (via downsizing or reverse mortgage).

BUT I do not add the house equity into the 4% withdrawl calculation. Since this would create an artificially high withdrawl rate. Don't want to caught borrowing against the house to eat.

For those who include the house ... Is the house part of the 4% withdrawl ??

 

[cute fuzzy bunny]

No

But if the 4% thing ever doesnt work and I run out of money before I get old enough to tap other sources of income, the house turns into a cash cow.

Firecalc does have a place where you can put in the presumed year of selling your house and how much you get for it, doesnt it? Havent used it in a while.

 

[donheff]

For those who include the house ... Is the house part of the 4% withdrawl ??

Absolutely not. The reverse mortgage is a emergency measure if the doom predictors are right and 4% starts to eat up too much of the nest egg.