How Do You Value Your Home for Net Worth Purposes?

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DVMResident
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Re: How Do You Value Your Home for Net Worth Purposes?

Post by DVMResident » Fri Mar 30, 2018 10:38 am

Cash-on-sale should be included in NW calculations.

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Re: How Do You Value Your Home for Net Worth Purposes?

Post by aj76er » Fri Mar 30, 2018 10:42 am

I get a monthly email from Zillow on my home value. For NW inclusion, I take the Zillow quoted home value and multiply by 95% to account for selling fees.

The NW calculation I do is more if a curiosity. It's not very actionable, but helps me see my financial picture a little better. For example, if my home became > 50% of NW I'd probably think about downsizing.
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SQRT
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Re: How Do You Value Your Home for Net Worth Purposes?

Post by SQRT » Fri Mar 30, 2018 10:43 am

I figure precision isn’t really necessary so I simply include an even amount representing a ballpark guess. Real estate only represents about 20% of our net worth so this seems reasonable. Do the whole thing in my head and round to nearest $million.

Why is this an important consideration to you. Estate purposes (makes sense). Scorekeeping? Ego? Comparisons(thus ego)?

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Re: How Do You Value Your Home for Net Worth Purposes?

Post by LiterallyIronic » Fri Mar 30, 2018 10:54 am

Raryn wrote:
Fri Mar 30, 2018 10:34 am
KlangFool wrote:
Thu Mar 29, 2018 3:34 pm
Raryn wrote:
Thu Mar 29, 2018 2:57 pm

Klangfool, your pessimism on the topic of homeownership is legendary, but this is ridiculous. If you use a "rule" that you can't buy a house until your net worth is 2.5x the purchase price, practically no one would *ever* be able to "afford" a house before retirement! There are tons of circumstances in which case it may make more sense to buy than rent depending on your job stability and local market conditions, and net worth (outside of availability of down payment and a leftover emergency fund) is a minimal consideration in determining them. You can (and have in the past) argue that there is no such thing as job stability and local market conditions are a guess at best, but you'd be wrong more often than not.

In addition, the house is an asset. You can't include the mortgage as an expense and not include the equity as an asset.
Raryn,

Your choice and your life.

<<practically no one would *ever* be able to "afford" a house before retirement! >>

1) And, why is that a bad thing? Between feeding a family versus feeding a house, which one should be more important?

2) I bought a house with my rule.

<< You can (and have in the past) argue that there is no such thing as job stability and local market conditions are a guess at best, but you'd be wrong more often than not.>>

This is a personal finance forum. Just make sure that you make the right decision for yourself. Whether I am right or wrong is irrelevant, you will have to live with your decision.

KlangFool
You might have been able to do it, but your "rule" is still exceedingly conservative. The typical (still conservative, but reasonably so) rule of thumb is to not spend more than 28% of your gross income on PITI, which is much more reasonable for the majority of the population, and leaves the majority of your take home for feeding your family. Depending on the length of the mortgage, interest rates, etc, that comes out to a house worth somewhere around 3x your yearly income. Note, that that rule of thumb also doesn't include net worth in the slightest.

My home equity is somewhere around 20% of my net worth, but the actual value of the house is approximately equal to my total net worth (that is, all of my non-equity assets are approximately equal to my mortgage), and I'm far beyond most of my peers when it comes to retirement savings etc. I would never consider myself anywhere close to "house poor", but by your standards I'd need to triple or more my net worth to not be it. *shrug*
Don't bother talking to KF about it, it's a huge waste of time. His recommendations are insane. He recommends that I have 90% of my retirement goal before I buy a house and apparently if I don't do that I'm deciding between "feeding my family and buying a house."

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Re: How Do You Value Your Home for Net Worth Purposes?

Post by grettman » Fri Mar 30, 2018 11:02 am

I do not include my house in my net worth calculations.

I don't include my car and my sofa either.

I track all investable assists.

I track my net worth because when hits a certain number and my house is paid for, I know I can pull the rip cord.

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Re: How Do You Value Your Home for Net Worth Purposes?

Post by Ice-9 » Fri Mar 30, 2018 11:06 am

I haven't read through all the responses, but would like to answer the OP that the method for valuing the home in net worth calculation would vary with the purpose of the net worth calculation.

(a) For my own purposes, keeping track of net worth. Precision isn't that important, and I've found Zillow is good enough. Also, I use Personal Capital to automatically calculate net worth, and they use Zillow's estimate anyway.

(b) In our recent efforts to adopt a child, we were asked to provide a complete financial statement, which calculated our net worth. The adoption agency told us we could feel free to use any of the online home value estimators, as long as we cited it. We used Redfin here, because it estimated $50k larger value than Zillow and others did. We didn't feel this was precise, but it made our situation look $50k better, and was within the prescribed rules.

(c) If for some reason, I needed to come up with as accurate as possible net worth. Here, I would do an analysis of recently sold comps in the neighborhood to probably make an adjustment to Zillow's estimate. But for everyday purposes as with (a) above, I'd save the effort and just go with Zillow.

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Re: How Do You Value Your Home for Net Worth Purposes?

Post by MnyGrl » Fri Mar 30, 2018 11:10 am

ryman554 wrote:
Fri Mar 30, 2018 9:23 am
bengal22 wrote:
Thu Mar 29, 2018 10:04 am
I include home value in my net worth. I use a conservative value and also subtract 6% for my cost to sell it. And I put my mortgage loan balance in my liability section.

I for one, think that net worth is the most important financial measurement that I track. It is the purest measurement of my financial health. Yes I track my "investable" performance(which I calculate as my mutual funds and cash). But I want to know my overall number which includes my assets and my liabilities. I realize that it is this total which is going to drive how much money I will have available at any given time. If I had a 5000K mortgage or if I have a 5000 mortgage it makes a big difference on what assets I can access. I truly do not understand why net worth is not important unless you have so much money that it ceases to be important. Or you have so much debt you don't want to know.
Precisely.

I will add that I can't wait to get out of the HCOL area I live in and get to a saner, rainier, not-so-HCOL area on the best coast. <flame away!!>

So, tracking current home value and NW, independently of "investible assets" is a useful metric to see how much money I can unlock when it gets closer to the time to get out of dodge. I imagine the same is true for those looking to downsize in retirement.

You can't eat your home, but you can leverage it to eat nicely in some other home.
I do the same. I don't count it for ego or any other reason, just to feel like I'm making progress. It is great to see the balance going down and net worth going up.

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Re: How Do You Value Your Home for Net Worth Purposes?

Post by michaeljc70 » Fri Mar 30, 2018 11:10 am

Interesting comments on the value of NW. Certainly someone with $1 million in investable assets that rents is not in the same position as someone with $1 million in investable assets and owns a 400k home free and clear.

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Re: How Do You Value Your Home for Net Worth Purposes?

Post by Clever_Username » Fri Mar 30, 2018 11:13 am

White Coat Investor wrote:
Fri Mar 30, 2018 12:29 am
nisiprius wrote:
Wed Mar 28, 2018 1:35 pm
You have to begin by asking why you want to know your net worth and what you will use the number for. I've never been able to figure out any actual use for it other than to make me feel good and/or have an answer if someone asks me my net worth. Which I don't think has ever happened, in fact.
The use for it is to focus you on what matters- net worth rather than income. I think people ought to calculate their net worth once a year and write it down somewhere. But after a decade of doing that, you've probably wrung all the benefit out of the exercise that you're going to.
What benefit is there to this? I'm asking out of ignorance, not as a challenge to you. I might start doing it if there's a possible benefit.
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Alexa9
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Re: How Do You Value Your Home for Net Worth Purposes?

Post by Alexa9 » Fri Mar 30, 2018 11:22 am

Some say not to include home in net worth or consider it an investment unless you're significantly downsizing soon.

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Re: How Do You Value Your Home for Net Worth Purposes?

Post by ResearchMed » Fri Mar 30, 2018 11:23 am

Clever_Username wrote:
Fri Mar 30, 2018 11:13 am
White Coat Investor wrote:
Fri Mar 30, 2018 12:29 am
nisiprius wrote:
Wed Mar 28, 2018 1:35 pm
You have to begin by asking why you want to know your net worth and what you will use the number for. I've never been able to figure out any actual use for it other than to make me feel good and/or have an answer if someone asks me my net worth. Which I don't think has ever happened, in fact.
The use for it is to focus you on what matters- net worth rather than income. I think people ought to calculate their net worth once a year and write it down somewhere. But after a decade of doing that, you've probably wrung all the benefit out of the exercise that you're going to.
What benefit is there to this? I'm asking out of ignorance, not as a challenge to you. I might start doing it if there's a possible benefit.
As mentioned, the house value could be tapped for nursing home/long term care. It's "there if needed", in terms of another resource.

And for others, like us, who *plan* to sell their homes and move into independent living/assisted living/etc., well... it's obvious why the value of one's home "matters".

The only reason I can think of to totally disregard the value of one's home is is someone has so much available that it is incomprehensible that one would need to sell the house for *any* emergency or long term care type needs, and even if that happened, they'd still not sell, and wouold just wait for the house to become part of the estate.
(And then, as mentioned by others, it might be something that should be taken into account for estate *planning* purposes, if there is that much in total wealth beyond the house...)

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Re: How Do You Value Your Home for Net Worth Purposes?

Post by BogleBoogie » Fri Mar 30, 2018 11:32 am

In my opinion, knowing your net worth is important. For starters, it is a great way to track your progress (or lack of) as you work towards becoming financially independent. An example where knowing our family net worth comes in handy for me is when I run different "what if" scenarios. If I were to lose my job and we decided to move out of the area to a lower cost of living city, what financial position would be in? I also think knowing what percentage of your net worth is liquid or tied up in something (like a house) is good to know.

As pointed out previously, I don't anticipate anyone asking me my net worth nor would I ever disclose that. Not knowing where you are at in terms of net worth is a choice, but seems like a better choice to have that information versus putting your head in the sand.

As for home, I do count my home equity as part of my net worth. I DON'T aggressively pay down my house. I make the minimum payment (no extra principal) and divert the surplus cash into retirement accounts and other investments. That choice is very subjective and an endless boglehead debate.

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Re: How Do You Value Your Home for Net Worth Purposes?

Post by midareff » Fri Mar 30, 2018 11:34 am

To answer your headline.... NOT at all. As far as net worth.. only the amount at today's closing market + cash savings - credit card debt.

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Re: How Do You Value Your Home for Net Worth Purposes?

Post by KlangFool » Fri Mar 30, 2018 11:35 am

Raryn wrote:
Fri Mar 30, 2018 10:34 am
KlangFool wrote:
Thu Mar 29, 2018 3:34 pm
Raryn wrote:
Thu Mar 29, 2018 2:57 pm

Klangfool, your pessimism on the topic of homeownership is legendary, but this is ridiculous. If you use a "rule" that you can't buy a house until your net worth is 2.5x the purchase price, practically no one would *ever* be able to "afford" a house before retirement! There are tons of circumstances in which case it may make more sense to buy than rent depending on your job stability and local market conditions, and net worth (outside of availability of down payment and a leftover emergency fund) is a minimal consideration in determining them. You can (and have in the past) argue that there is no such thing as job stability and local market conditions are a guess at best, but you'd be wrong more often than not.

In addition, the house is an asset. You can't include the mortgage as an expense and not include the equity as an asset.
Raryn,

Your choice and your life.

<<practically no one would *ever* be able to "afford" a house before retirement! >>

1) And, why is that a bad thing? Between feeding a family versus feeding a house, which one should be more important?

2) I bought a house with my rule.

<< You can (and have in the past) argue that there is no such thing as job stability and local market conditions are a guess at best, but you'd be wrong more often than not.>>

This is a personal finance forum. Just make sure that you make the right decision for yourself. Whether I am right or wrong is irrelevant, you will have to live with your decision.

KlangFool
You might have been able to do it, but your "rule" is still exceedingly conservative. The typical (still conservative, but reasonably so) rule of thumb is to not spend more than 28% of your gross income on PITI, which is much more reasonable for the majority of the population, and leaves the majority of your take home for feeding your family. Depending on the length of the mortgage, interest rates, etc, that comes out to a house worth somewhere around 3x your yearly income. Note, that that rule of thumb also doesn't include net worth in the slightest.

My home equity is somewhere around 20% of my net worth, but the actual value of the house is approximately equal to my total net worth (that is, all of my non-equity assets are approximately equal to my mortgage), and I'm far beyond most of my peers when it comes to retirement savings etc. I would never consider myself anywhere close to "house poor", but by your standards I'd need to triple or more my net worth to not be it. *shrug*
Majority of the population is not doing well financially. So, it is a good indication that the 28% rule is not working well.

Better than my peers is not my goal in life. My goal is to achieve FI within my time frame.
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Re: How Do You Value Your Home for Net Worth Purposes?

Post by radiowave » Fri Mar 30, 2018 11:42 am

LiterallyIronic wrote:
Wed Mar 28, 2018 2:08 pm
I simply take Zillow's estimate and subtract the amount of our outstanding mortgage. I don't bother with taking out 6% for selling it, because we may or may not sell it. It's not like the value of the house really makes any difference - I can retire when I have $600,000 and a paid off house, regardless of how much that house is worth.
I take a similar approach tracking $ to pay off mortgage and equity both from price paid as well as Zillow estimate which is pretty accurate for our neighborhood. We are in late accumulation phase (tentative retirement class of 2023) so our goals are to move to a LCOL setting and new home that will be paid off from the equity in our current home. I track our overall portfolio net worth, current equity in our home as a separate line item, and current expenses with and without mortgage payment on an annual basis that helps model different future scenarios, e.g. building an income floor that meets expenses with and without a mortgage payment in early retirement.
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Re: How Do You Value Your Home for Net Worth Purposes?

Post by bgf » Fri Mar 30, 2018 12:07 pm

bogglizer wrote:
Fri Mar 30, 2018 10:07 am
bgf wrote:
Thu Mar 29, 2018 10:15 am
bogglizer wrote:
Thu Mar 29, 2018 8:49 am
Purchase price would never work for me. Every recent home I have purchased has been distressed in some way, and the value of the house pops up immediately after purchase. My current house was purchased for $1.05M (HCOL area) and was $1.4M on Zillow a few months later. Besides, using a fixed price for an appreciating asset is no more sensible that using it for a depreciating asset. We don't buy a car for $50K and then use that as the value ten years later.
our situations are very different. we purchased our home 3 years ago, but purchase price is still accurate estimate of current market value for us. if anything, i would be conservative, which I am fine with.

i use kelley blue book for our cars, and it would be absurd to use car purchase price as an estimate for resale value. not at all comparable.
The point is that assets that can be marked to market should be. Houses are no different than cars; one you need to live in, the other to get elsewhere. The only difference from an accounting point of view is the sign of the depreciation/appreciation is assumed opposite.

Personally, as an engineer, I would prefer to accurately determine my net worth, and then put a margin on top of that. The answer may be similar to being conservative, but I would know more afterwards.
i agree that assets that can be marked to market should be, but not all can be. and i would disagree with you that houses are no different than cars. they are incredibly different for reasons im sure i dont have to spell out to you.

it is not possible for us to accurately estimate the current market value of our home. we live in an area with a population of approx. 200k, and zillow just isn't accurate, especially for my specific neighborhood. there aren't enough comparables to have any accurate month to month market value for my specific home. there are any number of ways i could attempt to estimate the value, and i've just chosen to use purchase price at this time, for several reasons. but again, it is not the market telling me the value; i am forced to arrive at my own estimate of it.
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Re: How Do You Value Your Home for Net Worth Purposes?

Post by Jebediah » Fri Mar 30, 2018 1:27 pm

You can account for your home as a consumable (not part of net worth) or an investment asset (part of net worth). What's important is that you stick with one of the two designations when determining your A) net worth and B) spending, in order to determine C) your FI number (based on the SWR of your choice). The key is to include your shelter expense in your spending (yes, even though you live in your paid-for house!) if you count your home's value in your net worth.

Example:

Say you have a paid-for 500k FMV home that you live in but would otherwise generate $20k a year in yield (rent). And $500k in stocks/bonds/cash. Your self-determined SWR is 4% (25x spending). You spend 40k a year. You're trying to compute your FI number.

Correct acounting (home is an asset)
Net worth = 500k (home) + 500k (stock/bond) = 1m
Spending = 40k (everything minus shelter) + 20k shelter = 60k
FI number = 60k x 25 = 1.5m
Conclusion: not yet FI

Correct acounting (home is a consumable)
Net worth = 500k (stock/bond)
Spending = 40k (everything minus shelter) + 0 (shelter) = 40k
FI number = 40k x 25 = 1m
Conclusion: not yet FI

Incorrect acounting (mixing asset and consumable)
Net worth = 500k (home) + 500k (stock/bond) = 1m
Spending = 40k (everything minus shelter) + 0 (shelter) = 40k
FI number = 40k x 25 = 1m
Conclusion: achieved FI

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Re: How Do You Value Your Home for Net Worth Purposes?

Post by inbox788 » Fri Mar 30, 2018 4:18 pm

Jebediah wrote:
Fri Mar 30, 2018 1:27 pm
Incorrect acounting (mixing asset and consumable)
Net worth = 500k (home) + 500k (stock/bond) = 1m
Spending = 40k (everything minus shelter) + 0 (shelter) = 40k
FI number = 40k x 25 = 1m
Conclusion: achieved FI
I like the way you're breaking this down and it's prudent, but I think the 500k stock/bond can be spent down while the home value isn't touchable. You could spend down the home by getting a reverse mortgage (not recommended) and give up the home when you pass. It's viewing FI not simply from a number, but income or expense or other factors.

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Re: How Do You Value Your Home for Net Worth Purposes?

Post by Caduceus » Fri Mar 30, 2018 5:46 pm

Just value it at market value, net of transaction costs it would take to sell it, and adjust for the outstanding mortgage. In accounting terms, you would be recognizing both the asset and the embedded liability at fair value.

But if your goal is to figure out how close to financial independence you are, this is probably not the best way to go about it. If you had a million dollars and lived in a million dollar home, you would be consuming the entirety of the home's imputed rental income. In comparison, if you had a million dollars and lived only in a 500,000 home, and you used the remaining 500,000 to buy the identical house next door which you then rented out, you would only be consuming the rent of the first $500,000 but earning both the rent and the capital appreciation on the second $500,000.

This is why housing is primarily a consumption item and not the best investment. You earn more if you are the landlord, whether this means that you rent out houses or you rent out capital; you earn less if you consume the rents from your capital by living in a bigger house.

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Re: How Do You Value Your Home for Net Worth Purposes?

Post by United2008 » Fri Mar 30, 2018 6:01 pm

We live in a VHCOL area in a fairly standard neighborhood. This produces pretty reliable comparables for the Zillow estimate. I take 85% of the current Zillow value each quarter and use that value as part of our net worth calculation (less principal on the mortgage, of course).

I consider our home to be part of our invested assets because I expect that we will sell the house at some point to help fund an early retirement (and facilitate moving to a lower COL area). I'm sure some disagree with this approach, but I think the "right answer" depends on whether a particular home is a forever proposition or just an illiquid (leveraged) asset.

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Re: How Do You Value Your Home for Net Worth Purposes?

Post by White Coat Investor » Wed Apr 04, 2018 9:17 am

Clever_Username wrote:
Fri Mar 30, 2018 11:13 am
White Coat Investor wrote:
Fri Mar 30, 2018 12:29 am
nisiprius wrote:
Wed Mar 28, 2018 1:35 pm
You have to begin by asking why you want to know your net worth and what you will use the number for. I've never been able to figure out any actual use for it other than to make me feel good and/or have an answer if someone asks me my net worth. Which I don't think has ever happened, in fact.
The use for it is to focus you on what matters- net worth rather than income. I think people ought to calculate their net worth once a year and write it down somewhere. But after a decade of doing that, you've probably wrung all the benefit out of the exercise that you're going to.
What benefit is there to this? I'm asking out of ignorance, not as a challenge to you. I might start doing it if there's a possible benefit.
It tells you which direction your net worth is going and how quickly. You're basically tracking your way toward your goals. What you measure improves.
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Re: How Do You Value Your Home for Net Worth Purposes?

Post by Glockenspiel » Wed Apr 04, 2018 9:22 am

Jon H wrote:
Wed Mar 28, 2018 1:30 pm
Zillow should be pretty close unless you've made some significant modifications that haven't been updated on their site. Be aware that home value on Zillow will fluctuate with the buying/selling seasons.
Depending where you are, Zillow can be wildly inaccurate, 20% off or more. I use comparable sales from the MLS. My neighborhood has a lot of comparable homes, so it's a really good gauge.

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Re: How Do You Value Your Home for Net Worth Purposes?

Post by rtr-molar-doc » Wed Apr 04, 2018 9:30 am

I disagree with including your home in your 'net worth' because we all have to live somewhere. I only include the land my house and building are on toward my net worth. I have 600 acres of wooded land up here in N. Wisc. The land IS worth something as I can sell it. If I sell my home, I have to find another place to live. Same goes with including cars/trucks/etc. Unless they are collector antique vehicals, they are being used and shouldn't be included in net worth. I also don't include my clothes or my kitchen appliances.

The other thing that goes into it is the real estate market(nationwide and local). Those values go up and down over the decades. Sometimes values for a home go way up, then sometimes in recessions they go way down. I don't include 'stuff' I need to live in net worth. If you have a vacation home(paid for in full), I would include that in net worth as you don't NEED to live there.

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Re: How Do You Value Your Home for Net Worth Purposes?

Post by rhinopylon » Wed Apr 04, 2018 9:30 am

Of course your home value is included in your net worth calculation. It's an asset. Banks count it as an asset. You're able to divest it if you need and then you have extra cash. I use Zillow's estimate but recognize it's only a rough guess. I include it in my total networth but I use bar charts in google spreadsheets to sum up my networth so I can quickly see how much of it is cash/investments/real estate/etc...

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Re: How Do You Value Your Home for Net Worth Purposes?

Post by alfaspider » Wed Apr 04, 2018 9:36 am

Jebediah wrote:
Fri Mar 30, 2018 1:27 pm
You can account for your home as a consumable (not part of net worth) or an investment asset (part of net worth). What's important is that you stick with one of the two designations when determining your A) net worth and B) spending, in order to determine C) your FI number (based on the SWR of your choice). The key is to include your shelter expense in your spending (yes, even though you live in your paid-for house!) if you count your home's value in your net worth.

Example:

Say you have a paid-for 500k FMV home that you live in but would otherwise generate $20k a year in yield (rent). And $500k in stocks/bonds/cash. Your self-determined SWR is 4% (25x spending). You spend 40k a year. You're trying to compute your FI number.

Correct acounting (home is an asset)
Net worth = 500k (home) + 500k (stock/bond) = 1m
Spending = 40k (everything minus shelter) + 20k shelter = 60k
FI number = 60k x 25 = 1.5m
Conclusion: not yet FI

Correct acounting (home is a consumable)
Net worth = 500k (stock/bond)
Spending = 40k (everything minus shelter) + 0 (shelter) = 40k
FI number = 40k x 25 = 1m
Conclusion: not yet FI

Incorrect acounting (mixing asset and consumable)
Net worth = 500k (home) + 500k (stock/bond) = 1m
Spending = 40k (everything minus shelter) + 0 (shelter) = 40k
FI number = 40k x 25 = 1m
Conclusion: achieved FI
If you are talking net worth, there's no two ways about it: it's assets minus liabilities. However, you may want to use something other than net worth when determining if you are truly FI for precisely the reasons in your example.

I like to think of a "Basic FI" number where one has sufficient assets that they could never work again and lead a reasonable lifestyle, but doing so would require down scaling lifestyle including selling the house. The person in scenario 3 could sell the house, find cheaper housing, and downscale to live withing the budget $1M assets would provide. It's a flexible number based on the lowest spending level one would be comfortable living at. The traditional FI number is based on past spending (with perhaps a few adjustments) which may or may not be representative of what someone plans to spend in the future.

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Re: How Do You Value Your Home for Net Worth Purposes?

Post by bigtex » Wed Apr 04, 2018 10:02 am

One thing about Zillow values that I've noticed. Say your Zillow zestimate value showed $200k the month before you list your home for sale. When the home is listed for sale on Zillow, Zillow immediately adjusts the zestimate to a value nearly identical to the listing price. So in this case, if you list your home for sale at $250k, Zillow will most likely ratchet up their zestimate to $247k or something like that.

SeaToTheBay
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Re: How Do You Value Your Home for Net Worth Purposes?

Post by SeaToTheBay » Wed Apr 04, 2018 11:30 am

I take the average of Zillow and Redfin estimates (in my case, they both seem quite realistic given local comps) and subtract our mortgage amount.

I am not sure why you wouldn't factor it into NW. I agree it is not really an "investment asset" but that's a separate calculation from NW. I would much rather own a million dollar home free and clear than not - why shouldn't that be reflected in my NW?

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Re: How Do You Value Your Home for Net Worth Purposes?

Post by TG2 » Wed Apr 04, 2018 12:29 pm

bengal22 wrote:
Thu Mar 29, 2018 10:04 am
I include home value in my net worth. I use a conservative value and also subtract 6% for my cost to sell it. And I put my mortgage loan balance in my liability section.

I for one, think that net worth is the most important financial measurement that I track. It is the purest measurement of my financial health. Yes I track my "investable" performance(which I calculate as my mutual funds and cash). But I want to know my overall number which includes my assets and my liabilities. I realize that it is this total which is going to drive how much money I will have available at any given time. If I had a 5000K mortgage or if I have a 5000 mortgage it makes a big difference on what assets I can access. I truly do not understand why net worth is not important unless you have so much money that it ceases to be important. Or you have so much debt you don't want to know.
You should add one more category (at least.) My home is paid off and my plan is to never sell. Given that, the value of my home is unimportant and affects me not at all. That being the case, I consider net worth to be almost irrelevant. Yes, home equity should always be considered as part of net worth. That is the definition. If someone doesn't do that then they are not in fact talking about net worth, but for me that number doesn't matter. What DOES matter is my investable assets (and for the record I have dramatically less than many people here so definitely not "so much money....") The financial assets are what will determine my future. If everything else cratered and I needed to sell my house, I could, but that is not the plan and would never be my preference.

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Re: How Do You Value Your Home for Net Worth Purposes?

Post by Rat_Race » Wed Apr 04, 2018 1:12 pm

Zillow is low by almost $200k on my home, so in some areas it is far from accurate. I include my home value in my net worth since it is an asset, can be exchanged for cash, and is a large portion of my net worth. I also include a cash balance pension in my net worth, but not a defined benefit pension, which becomes regular income at retirement.

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Re: How Do You Value Your Home for Net Worth Purposes?

Post by Phineas J. Whoopee » Wed Apr 04, 2018 2:35 pm

I suppose I could decide not to include my incisors as teeth, but that wouldn't change the definition of teeth for the rest of the world.

Net worth is assets minus liabilities. An owned home is an asset. Any loan secured by it is a liability, as are other loans.

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Re: How Do You Value Your Home for Net Worth Purposes?

Post by TG2 » Wed Apr 04, 2018 6:11 pm

Jebediah wrote:
Fri Mar 30, 2018 1:27 pm
You can account for your home as a consumable (not part of net worth) or an investment asset (part of net worth). What's important is that you stick with one of the two designations when determining your A) net worth and B) spending, in order to determine C) your FI number (based on the SWR of your choice). The key is to include your shelter expense in your spending (yes, even though you live in your paid-for house!) if you count your home's value in your net worth.

Example:

Say you have a paid-for 500k FMV home that you live in but would otherwise generate $20k a year in yield (rent). And $500k in stocks/bonds/cash. Your self-determined SWR is 4% (25x spending). You spend 40k a year. You're trying to compute your FI number.

Correct acounting (home is an asset)
Net worth = 500k (home) + 500k (stock/bond) = 1m
Spending = 40k (everything minus shelter) + 20k shelter = 60k
FI number = 60k x 25 = 1.5m
Conclusion: not yet FI

Correct acounting (home is a consumable)
Net worth = 500k (stock/bond)
Spending = 40k (everything minus shelter) + 0 (shelter) = 40k
FI number = 40k x 25 = 1m
Conclusion: not yet FI

Incorrect acounting (mixing asset and consumable)
Net worth = 500k (home) + 500k (stock/bond) = 1m
Spending = 40k (everything minus shelter) + 0 (shelter) = 40k
FI number = 40k x 25 = 1m
Conclusion: achieved FI
Unless I am misunderstanding an awful lot, I find your examples and your way of thinking about this both bizarre and almost horrifying. It is not your net worth that defines financial independence, but your financial assets. Your example would suggest that someone with a paid-off million-dollar home and $40,000/year in total expenses would be financially independent even with zero savings or investments regardless of income. That is ludicrous. The 25x expenses rule (or whatever number you prefer) refers to savings and investments, not to net worth. "Financially independent" does not require one to sell their house to raise cash. Financially independent means you don't ever have to sell your house to raise cash because you draw enough from investments. Actual financial independence is when investment income exceeds your total expenses. The 25x rule (or 33x, whatever) is an approximation of that.

The better calculation is to first figure your annual expenses, which in this example is $40,000. If one is not yet receiving Social Security benefits, the FI number would be 25x $40,000, or $1,000,000 in savings. If one is receiving $20,000 in SS, the FI number would be 25x ($40,000 - $20,000) or $500,000 in savings.

Where home equity does come into play for FI purposes is if you decide to sell and either downsize or rent. At that point you would have converted equity into financial assets, simultaneously increasing financial assets while probably decreasing expenses. Doing that could greatly affect your FI calculation. Unless you sell the house, though, your equity has no effect on your FI number.

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Re: How Do You Value Your Home for Net Worth Purposes?

Post by Hyperborea » Wed Apr 04, 2018 6:25 pm

barnaclebob wrote:
Wed Mar 28, 2018 2:54 pm
I keep it simple: 90% of Zillow value. Zillow should be with about 5% which is close enough for me.
I don't trust the Zillow numbers. They are notoriously bad at pricing. I've seen numbers that are far too high and again far too low (based on actual MLS sales numbers). Even after the sale is recorded on MLS they don't correct their numbers. The Zillow estimate of my home was about 70% of what it actually sold for.
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Re: How Do You Value Your Home for Net Worth Purposes?

Post by michaeljc70 » Wed Apr 04, 2018 6:45 pm

TG2 wrote:
Wed Apr 04, 2018 12:29 pm
bengal22 wrote:
Thu Mar 29, 2018 10:04 am
I include home value in my net worth. I use a conservative value and also subtract 6% for my cost to sell it. And I put my mortgage loan balance in my liability section.

I for one, think that net worth is the most important financial measurement that I track. It is the purest measurement of my financial health. Yes I track my "investable" performance(which I calculate as my mutual funds and cash). But I want to know my overall number which includes my assets and my liabilities. I realize that it is this total which is going to drive how much money I will have available at any given time. If I had a 5000K mortgage or if I have a 5000 mortgage it makes a big difference on what assets I can access. I truly do not understand why net worth is not important unless you have so much money that it ceases to be important. Or you have so much debt you don't want to know.
You should add one more category (at least.) My home is paid off and my plan is to never sell. Given that, the value of my home is unimportant and affects me not at all. That being the case, I consider net worth to be almost irrelevant. Yes, home equity should always be considered as part of net worth. That is the definition. If someone doesn't do that then they are not in fact talking about net worth, but for me that number doesn't matter. What DOES matter is my investable assets (and for the record I have dramatically less than many people here so definitely not "so much money....") The financial assets are what will determine my future. If everything else cratered and I needed to sell my house, I could, but that is not the plan and would never be my preference.
If you are cutting things close (for retirement), or even if you aren't and there is a black swan event, a home can be sold or reverse mortgaged. It is a fallback option. I hope it doesn't come to that, but there is some comfort in knowing if things go south I at least own my home vs. no other non-investment assets.

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Re: How Do You Value Your Home for Net Worth Purposes?

Post by goodenyou » Wed Apr 04, 2018 7:01 pm

It appears that those who dismiss home equity in their net worth believe that the value of home equity is not actionable. That is, decisions on creating cash flow for retirement spending is independent of their home value. Decisions on delaying retirement may be based on removing the expense of a mortgage, but you cannot monetize the equity in your home for cash flow (without a reverse mortgage or cash-out refi). I don't think anyone would argue with the FACT that a home with equity is an asset. The question is what is the actionable value of the asset. If I lived in a highly desirable red-hot area for real estate where buyers are purchasing sight unseen, I may be more inclined to include it. I live in a low-desire area with a too-big-house that few can afford and that I will lose money on. The area allowed me to make more money in my work with geographic arbitrage, so I lived very comfortably in a McMansion. Thankfully, the value of my paid-off home is a very small fraction of my net worth. The loss won't hurt me. I just wish I could claim a capital loss instead of the free capital gains that come with home value appreciation.
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Re: How Do You Value Your Home for Net Worth Purposes?

Post by bengal22 » Wed Apr 04, 2018 7:17 pm

TG2 wrote:
Wed Apr 04, 2018 12:29 pm
bengal22 wrote:
Thu Mar 29, 2018 10:04 am
I include home value in my net worth. I use a conservative value and also subtract 6% for my cost to sell it. And I put my mortgage loan balance in my liability section.

I for one, think that net worth is the most important financial measurement that I track. It is the purest measurement of my financial health. Yes I track my "investable" performance(which I calculate as my mutual funds and cash). But I want to know my overall number which includes my assets and my liabilities. I realize that it is this total which is going to drive how much money I will have available at any given time. If I had a 5000K mortgage or if I have a 5000 mortgage it makes a big difference on what assets I can access. I truly do not understand why net worth is not important unless you have so much money that it ceases to be important. Or you have so much debt you don't want to know.
You should add one more category (at least.) My home is paid off and my plan is to never sell. Given that, the value of my home is unimportant and affects me not at all. That being the case, I consider net worth to be almost irrelevant. Yes, home equity should always be considered as part of net worth. That is the definition. If someone doesn't do that then they are not in fact talking about net worth, but for me that number doesn't matter. What DOES matter is my investable assets (and for the record I have dramatically less than many people here so definitely not "so much money....") The financial assets are what will determine my future. If everything else cratered and I needed to sell my house, I could, but that is not the plan and would never be my preference.
We are close to being on the same page. But because you have no mortgage, your net worth and financial picture is probably much rosier than someone with comparable investable assets and a mortgage.
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Re: How Do You Value Your Home for Net Worth Purposes?

Post by Jebediah » Wed Apr 04, 2018 8:05 pm

TG2 wrote:
Wed Apr 04, 2018 6:11 pm

Unless I am misunderstanding an awful lot, I find your examples and your way of thinking about this both bizarre and almost horrifying. It is not your net worth that defines financial independence, but your financial assets. Your example would suggest that someone with a paid-off million-dollar home and $40,000/year in total expenses would be financially independent even with zero savings or investments regardless of income. That is ludicrous. The 25x expenses rule (or whatever number you prefer) refers to savings and investments, not to net worth.
Yes, you misunderstand. My example suggests that a 1m home and 0 other assets yields a net worth of ZERO if the home is considered a consumable, and a net worth of 1m if the home is considered an asset (a liquid asset, specifically). But in the latter case, you must add shelter cost (imputed rent) to the expense side of the balance sheet because you are spending the yield of your investment asset when you opt to live in your home. Considered either way (asset or consumable), my example suggests NOT FI using your input of a 1m home, 0 stocks/bonds, and 40K non-shelter spending.

FI is absolutely based on one's liquid net worth. And houses/real estate are included in that because they are (typically) liquid, ie they can always be converted to spendable cash (just like a stock).

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Re: How Do You Value Your Home for Net Worth Purposes?

Post by letsgobobby » Wed Apr 04, 2018 10:35 pm

I use a conservative average of Trulia, Zillow, and Redfin. Knocking off an additional ten percent reflects the illiquidity and transaction costs to realize any of those assets.

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Re: How Do You Value Your Home for Net Worth Purposes?

Post by sco » Thu Apr 05, 2018 12:31 pm

Zillow is close enough.

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Re: How Do You Value Your Home for Net Worth Purposes?

Post by wrongfunds » Thu Apr 05, 2018 3:23 pm

FI is absolutely based on one's liquid net worth. And houses/real estate are included in that because they are (typically) liquid, ie they can always be converted to spendable cash (just like a stock).
This is patently false. I think joke about a farmer cooking his favorite pig one limb per month comes to my mind!

You can not take 4% from your house annually in most "normal" case. On the other hand, if you have 100 houses, then you can certainly liquidate a few every year to fund your lifestyle. If you are talking your primary and only house, then you really can't include that for your FI calculation.

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Re: How Do You Value Your Home for Net Worth Purposes?

Post by SGM » Thu Apr 05, 2018 3:50 pm

I don't calculate net worth. I do keep track of portfolio totals. Income and expenses are more important to me than net worth. The total portfolio can vary with up and down markets.

It is more important for me to have multiple sources of income. We will soon sell some non-income producing real estate and that will increase our portfolio and income. It will also decrease some expenses including real estate taxes and upkeep. I won't include this real estate in net worth until it is sold.

We could look at comparables and have used that information to demand a higher price for some of the real estate. But I don't calculate net worth.

I recently helped a relative with expenses and health care issues late in life. In that instance the value of the house was quite important in paying for long term care if the relative lived a very long time or needed higher levels of care. The house sold for 7.5% more than the asking price.

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Re: How Do You Value Your Home for Net Worth Purposes?

Post by mountain-lion » Thu Apr 05, 2018 4:19 pm

"I will always need a place to live" is a bad reason for ignoring your home's value in your net worth calculation.

Consider a situation where you don't own a home, but have $100,000 cash, and compare it to owning a home worth $100,000.

Everyone considers held cash as part of net worth. Regardless of your cash holdings, you still need housing, but no one argues that when you calculate your net worth, you should discount the value of that cash by the cost of housing. The cost of housing is properly included in your expenses.

Now, if you spend your $100,000 cash on a home, it's not your net worth that falls, but your expenses do.

The value of your home is imprecise unless you actually are about to sign the sale papers. But that doesn't mean it isn't part of your net worth.

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Re: How Do You Value Your Home for Net Worth Purposes?

Post by vitaflo » Thu Apr 05, 2018 4:46 pm

I use the assessed value the county uses to figure out my property tax. So far it's been "close enough". Which is about all I'm looking for when figuring out NW.

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Re: How Do You Value Your Home for Net Worth Purposes?

Post by bengal22 » Thu Apr 05, 2018 5:09 pm

White Coat Investor wrote:
Wed Apr 04, 2018 9:17 am
Clever_Username wrote:
Fri Mar 30, 2018 11:13 am
White Coat Investor wrote:
Fri Mar 30, 2018 12:29 am
nisiprius wrote:
Wed Mar 28, 2018 1:35 pm
You have to begin by asking why you want to know your net worth and what you will use the number for. I've never been able to figure out any actual use for it other than to make me feel good and/or have an answer if someone asks me my net worth. Which I don't think has ever happened, in fact.
The use for it is to focus you on what matters- net worth rather than income. I think people ought to calculate their net worth once a year and write it down somewhere. But after a decade of doing that, you've probably wrung all the benefit out of the exercise that you're going to.
What benefit is there to this? I'm asking out of ignorance, not as a challenge to you. I might start doing it if there's a possible benefit.
It tells you which direction your net worth is going and how quickly. You're basically tracking your way toward your goals. What you measure improves.
Exactly Mr. WCI. Not sure why this is argued. Net worth is net worth. Purest scorecard around.
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Re: How Do You Value Your Home for Net Worth Purposes?

Post by SQRT » Thu Apr 05, 2018 5:24 pm

Net worth is a well defined term but once you are retired it’s application is limited. Mostly for estate planning methinks. Cash flow available to spend along with expenses (fixed and variable) are what’s important. If you are planning to sell in the short term obviously real estate values take on greater importance.

This seems so self evident to me yet still we argue about it?

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Re: How Do You Value Your Home for Net Worth Purposes?

Post by Jebediah » Fri Apr 06, 2018 12:52 am

wrongfunds wrote:
Thu Apr 05, 2018 3:23 pm
FI is absolutely based on one's liquid net worth. And houses/real estate are included in that because they are (typically) liquid, ie they can always be converted to spendable cash (just like a stock).
This is patently false. I think joke about a farmer cooking his favorite pig one limb per month comes to my mind!

You can not take 4% from your house annually in most "normal" case. On the other hand, if you have 100 houses, then you can certainly liquidate a few every year to fund your lifestyle. If you are talking your primary and only house, then you really can't include that for your FI calculation.
It's absolutely true if the asset is liquid. The home you live in is most likely liquid, so you could sell it to pay for immediate expenses if need be, just like you would sell a share of BRK.A stock (which is worth as much as a house). The fact that you can't sell it in pieces doesn't matter-- you can still sell the whole thing, and should do so if needed.

Would anybody say you shouldn't count a share of BRK.A (worth $300K) when calculating one's FI number?

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Re: How Do You Value Your Home for Net Worth Purposes?

Post by White Coat Investor » Fri Apr 06, 2018 2:23 am

SQRT wrote:
Thu Apr 05, 2018 5:24 pm
Net worth is a well defined term but once you are retired it’s application is limited. Mostly for estate planning methinks. Cash flow available to spend along with expenses (fixed and variable) are what’s important. If you are planning to sell in the short term obviously real estate values take on greater importance.

This seems so self evident to me yet still we argue about it?
Who cares what the score is after you win the game? :)
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Re: How Do You Value Your Home for Net Worth Purposes?

Post by SQRT » Fri Apr 06, 2018 5:24 pm

White Coat Investor wrote:
Fri Apr 06, 2018 2:23 am
SQRT wrote:
Thu Apr 05, 2018 5:24 pm
Net worth is a well defined term but once you are retired it’s application is limited. Mostly for estate planning methinks. Cash flow available to spend along with expenses (fixed and variable) are what’s important. If you are planning to sell in the short term obviously real estate values take on greater importance.

This seems so self evident to me yet still we argue about it?
Who cares what the score is after you win the game? :)
The idea of “winning the game” has limited application in my view and I generally don’t think in these terms. The game (of life) continues till the end fo me and I keep playing.
Agree that once your retired net worth (other than for estate planning) is of limited use.

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Re: How Do You Value Your Home for Net Worth Purposes?

Post by Cycle » Fri Apr 06, 2018 6:32 pm

Zestimate. Real estate doesn't factor into retirement funds AA, but for Fire income I include rental income.

I calculate net worth bc millionaire next door was the first personal finance book I read and I want to get the inflation adjusted equivalent today. Around 1.6 or 1.7mil. just like all financial milestones besides actual implementation of FIRE, it will be an anticlimactic achievement.

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Re: How Do You Value Your Home for Net Worth Purposes?

Post by J295 » Fri Apr 06, 2018 6:57 pm

When I used to have to give personal financial statements to our firm’s bank, as a guarantor of a portion of the firm debt, all real estate had to be listed at its fair market value. When you give financial statements to a federally regulated financial institution it’s clear what is required.

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Re: How Do You Value Your Home for Net Worth Purposes?

Post by TG2 » Fri Apr 06, 2018 7:39 pm

Jebediah wrote:
Wed Apr 04, 2018 8:05 pm
TG2 wrote:
Wed Apr 04, 2018 6:11 pm

Unless I am misunderstanding an awful lot, I find your examples and your way of thinking about this both bizarre and almost horrifying. It is not your net worth that defines financial independence, but your financial assets. Your example would suggest that someone with a paid-off million-dollar home and $40,000/year in total expenses would be financially independent even with zero savings or investments regardless of income. That is ludicrous. The 25x expenses rule (or whatever number you prefer) refers to savings and investments, not to net worth.
Yes, you misunderstand. My example suggests that a 1m home and 0 other assets yields a net worth of ZERO if the home is considered a consumable, and a net worth of 1m if the home is considered an asset (a liquid asset, specifically). But in the latter case, you must add shelter cost (imputed rent) to the expense side of the balance sheet because you are spending the yield of your investment asset when you opt to live in your home. Considered either way (asset or consumable), my example suggests NOT FI using your input of a 1m home, 0 stocks/bonds, and 40K non-shelter spending.

FI is absolutely based on one's liquid net worth. And houses/real estate are included in that because they are (typically) liquid, ie they can always be converted to spendable cash (just like a stock).
I am not using your original numbers, but only the format. I specifically stated "total expenses" in my example, which includes the costs of living in your home. Property tax, utilities, maintenance, etc. Putting that into your original example it would be:
Net worth = $1,000,000 (home) + 0 (investments) = $1,000,000
Spending = $40,000 (all costs for everything including shelter. Divide it however you want. $20k each for shelter and non-shelter?)
FI number = $40,000 x 25 = $1,000,000
Conclusion: Achieved FI

Is that really what you are trying to say? It would look to me as needing $3,333/month with no investment income or savings to pay for it. And since I also specified "regardless of income" as if one did not yet receive either Social Security or pension benefits, I can't see how you make your example work. You would have to take money from the house, either by selling or refinancing. Doing either would make you by definition NOT financially independent regardless of what your number says. The idea of "imputing rent" seems silly. Just use your actual expenses.

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