Retiring with $0, or negative, net worth

[Rustic23]

I do not believe I could retire with 0 net worth. First off if you have some sort of emergency fund you have some net worth, maybe not much but some. Zero indicates not emergency fund. Does your $40,000 cover LTC, a sinking fund for repair replacement of auto and other big ticket items, deductibles if you get cancer of some other really expensive ailment that your health care only covers 80% of?

With zero net worth it is the things you did not plan for that are going to ruin you, and if you know what those are, you would plan for them. So no, I don't think you can retire with zero net worth.

 

[Texas Proud]

The OP question is hypothetical.... but who cares...


YES... if you have a steady cash flow that meets all your living needs you do not have to work....


But your hypo of zero net worth is where most have a problem... if you do own real estate, and it has a positive cash flow then you have net worth... you might not be able to sell the RE for more than you owe, but the positive cash flow has an economic value that you can calculate and that is your net worth...


Or another way to look at it... you buy an annuity that you can NOT cash out of no matter what... you only get the monthly payments.... is that annuity worth zero You do not have any assets if you spent your last check... when you die you will not have anything either... but with your RE, you will...

 

[arebelspy]

If you don't mind I'd be interesting in more detail (how much you paid, worth and rent) on the underwater house. If the market value of house gets cut in 1/2 the rent should drop also, although probably not by 1/2.

Sure. I'll probably start a thread soon with more details of our financial picture to get some thoughts, but the house in particular you're referring to was bought for 120k. It's in Vegas, and was bought at the very end of 08. Prices had fallen since the peak in mid 06, so I figured after 2 and 1/2 yard of dropping - it had last been sold for like 260k or so in 05, I'd have to check the public records - it was an okay time to buy. Whoops.

15% down (so 102k loan), which in the last two years has been paid down to like 98k. Is now worth about 85k. Whoops.

Mortgage, taxes, and insurance payment is 750/month. Rents for 1100/month. Built in 2004, so not too many repairs needed as of yet.

Not too underwater on that one (have another bought at the end of 07 which is worse), but I could see a similar case where one bought the house for a lot more earlier, had a bigger down payment so the mortgage was much smaller, but then the price dropped a bunch so they're cash flow positive but equity negative.

Some of the more recent ones have been better (I.e. Purchasing similar houses to that one but last fall instead of 08 for 75k that rent for 1000-1100; mortgage, taxes, and insurance come to about 400/month).

 

[jdw_fire]

YES... if you have a steady cash flow that meets all your living needs you do not have to work....


But your hypo of zero net worth is where most have a problem... if you do own real estate, and it has a positive cash flow then you have net worth... you might not be able to sell the RE for more than you owe, but the positive cash flow has an economic value that you can calculate and that is your net worth...

however in the hypo 1 or both of 2 things will happen: 1) rents will fall and/or 2) RE values will increase. it is a market anomaly that $0 net worth of real estate produces cash flow unless the neighborhood said RE is in is very dangerious/risky. once the markets correct $0 net worth of RE wont produce income at least not in neighborhoods that are not ghettos. so since it is probably a temporary positive cash flow, it is not advisable to retire on it.

 

[arebelspy]

however in the hypo 1 or both of 2 things will happen: 1) rents will fall and/or 2) RE values will increase. it is a market anomaly that $0 net worth of real estate produces cash flow unless the neighborhood said RE is in is very dangerious/risky. once the markets correct $0 net worth of RE wont produce income at least not in neighborhoods that are not ghettos. so since it is probably a temporary positive cash flow, it is not advisable to retire on it.

Right. And likely you'd start to have equity on principal pay down alone, even assuming no appreciation, eventually building net worth. Unless values continued to fall ke in line with, or exceeding, the amount your principal was being reduced by.

 

[clifp]

15% down (so 102k loan), which in the last two years has been paid down to like 98k. Is now worth about 85k. Whoops.

Mortgage, taxes, and insurance payment is 750/month. Rents for 1100/month. Built in 2004, so not too many repairs needed as of yet.

Not too underwater on that one (have another bought at the end of 07 which is worse), but I could see a similar case where one bought the house for a lot more earlier, had a bigger down payment so the mortgage was much smaller, but then the price dropped a bunch so they're cash flow positive but equity negative.

Some of the more recent ones have been better (I.e. Purchasing similar houses to that one but last fall instead of 08 for 75k that rent for 1000-1100; mortgage, taxes, and insurance come to about 400/month).

The astonishing thing to me is if you can get 30% down the payments on 85K house (~60k loan) is around $300/month add a $100-150 for taxes and insurance and you do make a very nice profit.

By way of comparison, $1000-$1100 rental gets you a tiny 400-600' studio in Honolulu in crappy building. The condo would typically go for around 200K with a 30% down your payments are around ~$750. By the time you pay taxes insurance and management and condo fees you'd be lucky to break even.

I am stock guy not real estate person, but it sure appears that Las Vegas rentals are better deals than Honolulu ones.

 

[arebelspy]

The astonishing thing to me is if you can get 30% down the payments on 85K house (~60k loan) is around $300/month add a $100-150 for taxes and insurance and you do make a very nice profit.

By way of comparison, $1000-$1100 rental gets you a tiny 400-600' studio in Honolulu in crappy building. The condo would typically go for around 200K with a 30% down your payments are around ~$750. By the time you pay taxes insurance and management and condo fees you'd be lucky to break even.

I am stock guy not real estate person, but it sure appears that Las Vegas rentals are better deals than Honolulu ones.

Yeah that's for a 3br/2bath 1600sqft place. The 400-600 sqft studios (condos) are more like 30k. But one annoying thing is most places in Vegas have HOAs, which can be a pain in the neck to deal with, and can add quite a bit of expenses (and many houses have HOAs, not just condos).

Real estate right now really does depend on the area. Vegas was so overinflated, it's fallen really hard. I wouldn't buy in Seattle right now, and California is just getting to levels approaching reasonable.

But like the famous Buffet quote goes, Be fearful when others are greedy, and greedy when others are fearful.