Why is Home Part of NW [Net Worth]

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michaeljc70
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Re: Why is Home Part of NW [Net Worth]

Post by michaeljc70 » Mon Oct 01, 2018 9:41 am

I don't know what a "net worth portfolio" is. Your home is part of your net worth because it is an asset. It is not part of your investment/retirement portfolio (typically) because you bought it to live in and if you sell it and spend the money on something else you have no where to live.

Admiral
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Re: Why is Home Part of NW [Net Worth]

Post by Admiral » Mon Oct 01, 2018 9:56 am

michaeljc70 wrote:
Mon Oct 01, 2018 9:41 am
I don't know what a "net worth portfolio" is. Your home is part of your net worth because it is an asset. It is not part of your investment/retirement portfolio (typically) because you bought it to live in and if you sell it and spend the money on something else you have no where to live.
This is only partially true. A home provides imputed rent. When you retire--and assuming you've paid off your mortgage--the home may be of significant value in your overall assets because it reduces what you need to draw from your investments to put toward rent (be that in a retirement home or something else.) Therefore, in at least one sense, it should be counted on as an asset in your portfolio that reduces your needs.

Let's also remember that a fixed rate loan is a real-life, active inflation hedge against higher costs in the future. In 12 years (or pick your number) when my mortgage is paid off, presumably those looking to rent or buy a home will be facing higher payments simply due to inflation.

Jags4186
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Re: Why is Home Part of NW [Net Worth]

Post by Jags4186 » Mon Oct 01, 2018 10:28 am

I don't understand why this is always so contentious/argued about/brought up.

It is part of your net worth. Is the cash in your pocket part of your net worth? It produces nothing at all. In fact the cash in your wallet is a depreciating asset. But if you had $500,000 cash in your pocket would you say that your net worth is everything in the bank/brokerage house + $500,000? Of course you would.

Net worth just isn't that useful of a number other than for estate planning purposes. You don't need to talk about imputed rent, buying and selling and relocating, etc. etc. etc. It doesn't matter. Your portfolio is your portfolio. Your house is your house. Your coin collection is your coin collection.

I vote ban all further posts about this subject because it's stupid.

MichCPA
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Re: Why is Home Part of NW

Post by MichCPA » Mon Oct 01, 2018 10:29 am

willthrill81 wrote:
Sun Sep 30, 2018 9:43 pm
KlangFool wrote:
Sun Sep 30, 2018 9:32 pm
1) I do not count net worth. It is a meaningless number.
A home with positive equity can be sold to generate liquid assets. That is very far from meaningless.
KlangFool wrote:
Sun Sep 30, 2018 9:32 pm
2) I only count my investment value aka the portfolio that can feed me when I am retired/FI.
A home owned free and clear should reduce one's spending needs compared to renting an equivalent home in all but a few rare instances.
We are getting into preference items. When I prep my financials, I segregate between "investable assets" and "working capital". Investable assets are along the lines of what Klang is talking about they can feed me or allow me to purchase what I need. I place higher importance on this than net worth. Working capital is the part of net worth it takes for me to live, housing, transportation, emergency cash, etc. I keep track of this because I think it is important to know what my lifestyle costs are even if they are non-cash, maybe similar to will. It is a component of net worth but it is good to make a distinction.

I think it is valuable post recession, to not look at your house as an investment on the same level as mutual funds. Very few people will move in and out of home on a whim based on expected risk or future returns, there are personal considerations that you don't have in a true investment. It is smart to keep track of all of your assets, but it is important not to reach and over-complicate and over-risk. As always know thyself.

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Re: Why is Home Part of NW

Post by Admiral » Mon Oct 01, 2018 10:35 am

MichCPA wrote:
Mon Oct 01, 2018 10:29 am
willthrill81 wrote:
Sun Sep 30, 2018 9:43 pm
KlangFool wrote:
Sun Sep 30, 2018 9:32 pm
1) I do not count net worth. It is a meaningless number.
A home with positive equity can be sold to generate liquid assets. That is very far from meaningless.
KlangFool wrote:
Sun Sep 30, 2018 9:32 pm
2) I only count my investment value aka the portfolio that can feed me when I am retired/FI.
A home owned free and clear should reduce one's spending needs compared to renting an equivalent home in all but a few rare instances.
We are getting into preference items. When I prep my financials, I segregate between "investable assets" and "working capital". Investable assets are along the lines of what Klang is talking about they can feed me or allow me to purchase what I need. I place higher importance on this than net worth. Working capital is the part of net worth it takes for me to live, housing, transportation, emergency cash, etc. I keep track of this because I think it is important to know what my lifestyle costs are even if they are non-cash, maybe similar to will. It is a component of net worth but it is good to make a distinction.

I think it is valuable post recession, to not look at your house as an investment on the same level as mutual funds. Very few people will move in and out of home on a whim based on expected risk or future returns, there are personal considerations that you don't have in a true investment. It is smart to keep track of all of your assets, but it is important not to reach and over-complicate and over-risk. As always know thyself.
I agree with this. I track both assets and debt as they apply to my NW. With each mortgage payment, the piece devoted to principal increases my NW b/c it decreases my debt. With each retirement contribution, my NW goes up as well.

It's helpful to know debt ratios to see if one is overextended, which may affect purchasing decisions. In that sense, knowing your net worth is valuable. One could also argue that the value of your home (less what you owe) provides exposure to the real estate market, which might influence your decision to, say, hold REITs.

It's all connected...

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Re: Why is Home Part of NW

Post by mptfan » Mon Oct 01, 2018 10:54 am

willthrill81 wrote:
Sun Sep 30, 2018 9:21 pm
Your net worth is all of your assets less your liabilities. Since a home is an asset, it belongs on the balance sheet.
Exactly.

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Re: Why is Home Part of NW [Net Worth]

Post by JohnFiscal » Mon Oct 01, 2018 12:42 pm

nisiprius wrote:
Mon Oct 01, 2018 7:12 am
I've never known what "net worth" is supposed to be good for, except for bragging. And quasi-bragging, letting financial institutions know some imprecise measure of how rich you are, and whether they can consider you "qualified" to buy into hedge funds and such.
well, for me, it's an indicator of what my standard of living will be in my retirement (which began 8 weeks ago). Essentially, my standard of living (L) will be a mathematical function of my net worth (W) and my perceived spend-down time (T): L = f(W, T) Of course, I'm not defining the details of the function. And I have to guess at the input T. :happy

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Re: Why is Home Part of NW [Net Worth]

Post by sandramjet » Mon Oct 01, 2018 12:47 pm

Jags4186 wrote:
Mon Oct 01, 2018 10:28 am

Net worth just isn't that useful of a number other than for estate planning purposes.
+1

I compute my net worth including house etc because it potentially impacts my estate planning. I ignore it for everything else.

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HomerJ
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Re: Why is Home Part of NW

Post by HomerJ » Mon Oct 01, 2018 12:55 pm

Quaestner wrote:
Sun Sep 30, 2018 9:27 pm
I agree that home equity is definitely an asset and part of your net worth. I think most of us here would say that home equity should NOT be part of your "asset allocation".
This.

The definition of "net worth" includes your home equity.

How you use it in your retirement plan depends on your circumstances.

Someone with a $1 million dollar CA home might plan to downsize to a $600,000 Texas home (technically, they'd probably get MORE house), so they could plan around using that extra $400,000 for retirement.

For me, I currently have $x in housing, and I intend to stay with $x in housing in retirement. So for me, I do not pay attention to my housing equity when working on my retirement plan. The value I get from that money is my expenses are lower, since I have no mortgage or rent payment.

Now, the money is there. It COULD be accessed if needed. So it's a PLAN B for me... It's another buffer of money I could use if absolutely needed (But I would consider my plan a failure if I had to)
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renue74
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Re: Why is Home Part of NW [Net Worth]

Post by renue74 » Mon Oct 01, 2018 1:15 pm

We live in a LCOL area and our home is not worth a lot, but if we ever downsized or moved to a different area...I think that we would find a comparable costing home...so we don't really count a house as part of net worth.

We do have 4 rental properties that account for about $465K of our worth (with no mortgages). Even though these are more used for rental business income, I actually do count them in our worth because...at retirement, we could potentially sell the rental property.

Steve723
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Re: Why is Home Part of NW [Net Worth]

Post by Steve723 » Mon Oct 01, 2018 1:22 pm

chevca wrote:
Mon Oct 01, 2018 8:59 am
Steve723 wrote:
Mon Oct 01, 2018 8:02 am
Heh, what I did after reading countless threads on this topic is to simply take the value of my home equity and cut it in half for financial planning purposes. How is that for compromise?
Why? Either count it or don't.
I use half of home equity for financial/retirement planning purposes, which is different from a pure net worth figure. The reason I use half is it reflects what I believe are valid arguments to count all of it versus none of it when planning one's retirement figure. Think of it as my own internal compromise.

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celia
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Re: Why is Home Part of NW

Post by celia » Mon Oct 01, 2018 1:30 pm

willthrill81 wrote:
Sun Sep 30, 2018 9:21 pm
Your net worth is all of your assets less your liabilities. Since a home is an asset, it belongs on the balance sheet.
+1
The value of your home is an asset.
But the remaining mortgage (principal still to be paid off) is a liability.

Calculating your net worth is one way to see if you are making progress from year to year. But if you are looking to retire, don't count the value of the house since you can't use it to buy food or pay medical expenses. You would need to be looking at liquid assets instead, the assets you could cash out at any time to use the money for spending.

Net Worth also matters as far as finding out the value of your estate. If your Net Worth is more than the Estate Tax exemption (currently $11 million) when you die, then you would owe Estate Taxes.

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Re: Why is Home Part of NW [Net Worth]

Post by delamer » Mon Oct 01, 2018 1:41 pm

8foot7 wrote:
Mon Oct 01, 2018 7:00 am
If you don't believe your home is part of your net worth, then please feel free to sign a quit-claim deed for your home over to me.
Or me!

The house next door to us is currently being rented, and would sell for about the same price as mine. We have a few hundred thousand dollars in equity.

Let’s say that the renter neighbor and I both agree that the zombie apocalypse is coming in 2020, and we decide to liquidate everything we own and convert it to gold bullion now.

Let’s further say that our renter neighbor has the same portfolio (in terms of dollars and allocation) as us.

We end up with more gold bullion because of our home equity.

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Re: Why is Home Part of NW [Net Worth]

Post by Caduceus » Mon Oct 01, 2018 6:26 pm

delamer wrote:
Mon Oct 01, 2018 1:41 pm
8foot7 wrote:
Mon Oct 01, 2018 7:00 am
If you don't believe your home is part of your net worth, then please feel free to sign a quit-claim deed for your home over to me.
Or me!

The house next door to us is currently being rented, and would sell for about the same price as mine. We have a few hundred thousand dollars in equity.

Let’s say that the renter neighbor and I both agree that the zombie apocalypse is coming in 2020, and we decide to liquidate everything we own and convert it to gold bullion now.

Let’s further say that our renter neighbor has the same portfolio (in terms of dollars and allocation) as us.

We end up with more gold bullion because of our home equity.
But surely the landlord is much richer than you would be, because while you were consuming the rents by living in your own house, he was intelligently renting out the place, thereby receiving both rents as well as any capital appreciation.

Of course homes are part of net worth calculations, but that does not make them good investments. Say I have 2 million dollars and I can allocate it however I choose. I can buy a house for $200,000 and invest 1.8 million dollars in surrounding properties and receive rental income. Or I can buy a 2 million dollar house and invest $0 in being a landlord. My net worth starts at $2 millio n in both cases, but in 10 years, they will look very different. Which portfolio is better?

Yes, homes are assets. No, homes are not the greatest investment opportunities. Financially, the best thing to do is live in the smallest house you are comfortable with.

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Re: Why is Home Part of NW

Post by lukestuckenhymer » Mon Oct 01, 2018 6:50 pm

willthrill81 wrote:
Sun Sep 30, 2018 9:43 pm
KlangFool wrote:
Sun Sep 30, 2018 9:32 pm
1) I do not count net worth. It is a meaningless number.
A home with positive equity can be sold to generate liquid assets. That is very far from meaningless.
+1

https://www.youtube.com/watch?v=dgct3Jn8pFA

2015
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Re: Why is Home Part of NW

Post by 2015 » Mon Oct 01, 2018 6:57 pm

lukestuckenhymer wrote:
Mon Oct 01, 2018 6:50 pm
willthrill81 wrote:
Sun Sep 30, 2018 9:43 pm
KlangFool wrote:
Sun Sep 30, 2018 9:32 pm
1) I do not count net worth. It is a meaningless number.
A home with positive equity can be sold to generate liquid assets. That is very far from meaningless.
+1

https://www.youtube.com/watch?v=dgct3Jn8pFA
Indeed. I just sold mine in The Trendiest Place On Earth to some rich people from China and walked away with an obscene amount of generated liquid assets. I will attest it was very far from meaningless.

delamer
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Re: Why is Home Part of NW [Net Worth]

Post by delamer » Mon Oct 01, 2018 6:58 pm

Caduceus wrote:
Mon Oct 01, 2018 6:26 pm
delamer wrote:
Mon Oct 01, 2018 1:41 pm
8foot7 wrote:
Mon Oct 01, 2018 7:00 am
If you don't believe your home is part of your net worth, then please feel free to sign a quit-claim deed for your home over to me.
Or me!

The house next door to us is currently being rented, and would sell for about the same price as mine. We have a few hundred thousand dollars in equity.

Let’s say that the renter neighbor and I both agree that the zombie apocalypse is coming in 2020, and we decide to liquidate everything we own and convert it to gold bullion now.

Let’s further say that our renter neighbor has the same portfolio (in terms of dollars and allocation) as us.

We end up with more gold bullion because of our home equity.
But surely the landlord is much richer than you would be, because while you were consuming the rents by living in your own house, he was intelligently renting out the place, thereby receiving both rents as well as any capital appreciation.

Of course homes are part of net worth calculations, but that does not make them good investments. Say I have 2 million dollars and I can allocate it however I choose. I can buy a house for $200,000 and invest 1.8 million dollars in surrounding properties and receive rental income. Or I can buy a 2 million dollar house and invest $0 in being a landlord. My net worth starts at $2 millio n in both cases, but in 10 years, they will look very different. Which portfolio is better?

Yes, homes are assets. No, homes are not the greatest investment opportunities. Financially, the best thing to do is live in the smallest house you are comfortable with.
I don’t think we are in disagreement.

The issue raised by the OP is not whether a home is a good investment or whether you should somehow reflect it in your asset allocation, but whether the equity in your home is part of your net worth.

And it is.

dknightd
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Re: Why is Home Part of NW [Net Worth]

Post by dknightd » Mon Oct 01, 2018 6:59 pm

It is pretty simple. Your home is worth money. Your mortgage is money you owe.
Subtract one from the other. That is how much cash you could get if you needed it.

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willthrill81
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Re: Why is Home Part of NW [Net Worth]

Post by willthrill81 » Mon Oct 01, 2018 7:58 pm

delamer wrote:
Mon Oct 01, 2018 6:58 pm
Caduceus wrote:
Mon Oct 01, 2018 6:26 pm
delamer wrote:
Mon Oct 01, 2018 1:41 pm
8foot7 wrote:
Mon Oct 01, 2018 7:00 am
If you don't believe your home is part of your net worth, then please feel free to sign a quit-claim deed for your home over to me.
Or me!

The house next door to us is currently being rented, and would sell for about the same price as mine. We have a few hundred thousand dollars in equity.

Let’s say that the renter neighbor and I both agree that the zombie apocalypse is coming in 2020, and we decide to liquidate everything we own and convert it to gold bullion now.

Let’s further say that our renter neighbor has the same portfolio (in terms of dollars and allocation) as us.

We end up with more gold bullion because of our home equity.
But surely the landlord is much richer than you would be, because while you were consuming the rents by living in your own house, he was intelligently renting out the place, thereby receiving both rents as well as any capital appreciation.

Of course homes are part of net worth calculations, but that does not make them good investments. Say I have 2 million dollars and I can allocate it however I choose. I can buy a house for $200,000 and invest 1.8 million dollars in surrounding properties and receive rental income. Or I can buy a 2 million dollar house and invest $0 in being a landlord. My net worth starts at $2 millio n in both cases, but in 10 years, they will look very different. Which portfolio is better?

Yes, homes are assets. No, homes are not the greatest investment opportunities. Financially, the best thing to do is live in the smallest house you are comfortable with.
I don’t think we are in disagreement.

The issue raised by the OP is not whether a home is a good investment or whether you should somehow reflect it in your asset allocation, but whether the equity in your home is part of your net worth.

And it is.
I can't imagine why some intelligent people here contest this. Do they believe that a home shouldn't be 'counted' in any way, but if the home was sold and the proceeds were invested that the additional capital got there by magic? I believe that Joshua Sheats of the Radical Personal Finance podcast did precisely that (i.e. sold his home and invested the proceeds; now RVs full time).
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ThriftyPhD
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Re: Why is Home Part of NW [Net Worth]

Post by ThriftyPhD » Mon Oct 01, 2018 9:08 pm

Another reason why you should include your home value (and mortgage) when calculating net worth, in addition to it simply being the way to do it given the definition of net worth.

If you ignore both home equity and liability, you might be tempted to play games such as a cash out refi to pull equity out of your house. If you ignore your home value, you would see this as a way to increase your net worth (cash goes into bank account, but you're not counting the increased mortgage). However, if you're correctly tracking net worth as assets - liabilities, you would see that you've added an equal amount to both assets and liabilities, and therefore did not actually increase your net worth (probably decreased given fees from the refi).

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watchnerd
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Re: Why is Home Part of NW

Post by watchnerd » Mon Oct 01, 2018 9:44 pm

The Wizard wrote:
Sun Sep 30, 2018 10:14 pm
KlangFool wrote:
Sun Sep 30, 2018 10:06 pm
willthrill81,

<<there was still home equity present. >>

Home equity only make sense when a person could sell the house and there were buyers. If nobody is buying, the home equity is zero. Whether the mortgage is paid off, it is irrelevant at that point.

KlangFool
I can't totally disagree, Klang, but in most US metropolitan areas, there is *always* a market for residential real estate.
But how much is a valid question.

In boomtown areas like parts of North Dakota, you can easily have zero value and a ghost town in two decades.
But not in Boston or Washington DC...
I fully own a house and acre of land, with timber, in the greater Seattle metro area.

Short of an extinction level event or volcanic explosion, there are zero circumstances in which that will be worth $0.

And if those happen, I have home owner's insurance....so I'd still get paid.
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Re: Why is Home Part of NW [Net Worth]

Post by freebeer » Mon Oct 01, 2018 9:52 pm

Caduceus wrote:
Mon Oct 01, 2018 6:26 pm
...
But surely the landlord is much richer than you would be, because while you were consuming the rents by living in your own house, he was intelligently renting out the place, thereby receiving both rents as well as any capital appreciation.

Of course homes are part of net worth calculations, but that does not make them good investments. Say I have 2 million dollars and I can allocate it however I choose. I can buy a house for $200,000 and invest 1.8 million dollars in surrounding properties and receive rental income. Or I can buy a 2 million dollar house and invest $0 in being a landlord. My net worth starts at $2 millio n in both cases, but in 10 years, they will look very different. Which portfolio is better?

Yes, homes are assets. No, homes are not the greatest investment opportunities. Financially, the best thing to do is live in the smallest house you are comfortable with.
"living in the smallest house your are comfortable with" is about spending less - not about investing. That's true whether you are spending rent directly or receiving imputed rental income from occupying an owned home. The issue with having a $2M house vs. a $200K house is exactly the same issue with spending $10,000 per month on rent vs. $1,000/month on rent. Of course the person who spends $10,000 a month on rent (direct or imputed) is going to have less money in 10 years (although a $2M house might see more capital appreciation than 10 $200K houses - if the former had been an average house in Palo Alto CA and the latter 10 average houses in Cleveland OH that would have been true over the past 10 years - that would probably not make up for the difference in rental income and carrying costs).

KlangFool's comment about potential lack of buyers is just indicating a factor for any income property or other illiquid capital asset and nothing to do with the asset in question being one's residence. So I don't think it's relevant to OP's question unless one is to exclude all such properties and assets from one's net worth, which makes absolutely no sense. If you want to calculate liquid net worth (something I do also track) then fine, do so - just don't confuse it with the general term "net worth" which means "assets minus liabilities".

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Re: Why is Home Part of NW

Post by 2pedals » Mon Oct 01, 2018 10:05 pm

watchnerd wrote:
Mon Oct 01, 2018 9:44 pm

I fully own a house and acre of land, with timber, in the greater Seattle metro area.

Short of an extinction level event or volcanic explosion, there are zero circumstances in which that will be worth $0.

And if those happen, I have home owner's insurance....so I'd still get paid.
Earthquakes are the most possible and present danger facing Seattle.

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watchnerd
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Re: Why is Home Part of NW

Post by watchnerd » Mon Oct 01, 2018 11:07 pm

2pedals wrote:
Mon Oct 01, 2018 10:05 pm
watchnerd wrote:
Mon Oct 01, 2018 9:44 pm

I fully own a house and acre of land, with timber, in the greater Seattle metro area.

Short of an extinction level event or volcanic explosion, there are zero circumstances in which that will be worth $0.

And if those happen, I have home owner's insurance....so I'd still get paid.
Earthquakes are the most possible and present danger facing Seattle.
Sure.

Which might flatten my house.

But only half of the value is in the house. The other half is in the land.

It won't go to $0 even if the house turns to match sticks.
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Re: Why is Home Part of NW

Post by HomerJ » Mon Oct 01, 2018 11:47 pm

watchnerd wrote:
Mon Oct 01, 2018 11:07 pm
2pedals wrote:
Mon Oct 01, 2018 10:05 pm
watchnerd wrote:
Mon Oct 01, 2018 9:44 pm

I fully own a house and acre of land, with timber, in the greater Seattle metro area.

Short of an extinction level event or volcanic explosion, there are zero circumstances in which that will be worth $0.

And if those happen, I have home owner's insurance....so I'd still get paid.
Earthquakes are the most possible and present danger facing Seattle.
Sure.

Which might flatten my house.

But only half of the value is in the house. The other half is in the land.

It won't go to $0 even if the house turns to match sticks.
Well, it will probably drop more than half when a prospective buyer finds out the last house built there was destroyed by an earthquake.

Imagine all those people with homes that got flooded recently... I certainly will not buy land that is proven prone to flooding.
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JoMoney
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Re: Why is Home Part of NW

Post by JoMoney » Mon Oct 01, 2018 11:57 pm

HomerJ wrote:
Mon Oct 01, 2018 11:47 pm
watchnerd wrote:
Mon Oct 01, 2018 11:07 pm
2pedals wrote:
Mon Oct 01, 2018 10:05 pm
watchnerd wrote:
Mon Oct 01, 2018 9:44 pm

I fully own a house and acre of land, with timber, in the greater Seattle metro area.

Short of an extinction level event or volcanic explosion, there are zero circumstances in which that will be worth $0.

And if those happen, I have home owner's insurance....so I'd still get paid.
Earthquakes are the most possible and present danger facing Seattle.
Sure.

Which might flatten my house.

But only half of the value is in the house. The other half is in the land.

It won't go to $0 even if the house turns to match sticks.
Well, it will probably drop more than half when a prospective buyer finds out the last house built there was destroyed by an earthquake.

Imagine all those people with homes that got flooded recently... I certainly will not buy land that is proven prone to flooding.
There are circumstances where property can go below zero, where the owner would be willing to pay to get out from under the liability of property taxes, HOAs, maint. responsibilities, etc... It's the regular situation with time shares, there were abandoned neighborhoods in Detroit where that happened.
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watchnerd
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Re: Why is Home Part of NW

Post by watchnerd » Mon Oct 01, 2018 11:58 pm

HomerJ wrote:
Mon Oct 01, 2018 11:47 pm
watchnerd wrote:
Mon Oct 01, 2018 11:07 pm
2pedals wrote:
Mon Oct 01, 2018 10:05 pm
watchnerd wrote:
Mon Oct 01, 2018 9:44 pm

I fully own a house and acre of land, with timber, in the greater Seattle metro area.

Short of an extinction level event or volcanic explosion, there are zero circumstances in which that will be worth $0.

And if those happen, I have home owner's insurance....so I'd still get paid.
Earthquakes are the most possible and present danger facing Seattle.
Sure.

Which might flatten my house.

But only half of the value is in the house. The other half is in the land.

It won't go to $0 even if the house turns to match sticks.
Well, it will probably drop more than half when a prospective buyer finds out the last house built there was destroyed by an earthquake.

Imagine all those people with homes that got flooded recently... I certainly will not buy land that is proven prone to flooding.
I'm not so sure...when I lived in San Francisco, it's full of buildings built on land previously demolished by earthquakes. Heck, the whole Embarcadero Freeway fell down in 1989 and now it's full of condos and the same land.
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HomerJ
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Re: Why is Home Part of NW

Post by HomerJ » Tue Oct 02, 2018 12:56 am

watchnerd wrote:
Mon Oct 01, 2018 11:58 pm
I'm not so sure...when I lived in San Francisco, it's full of buildings built on land previously demolished by earthquakes. Heck, the whole Embarcadero Freeway fell down in 1989 and now it's full of condos and the same land.
Good point.
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GeoffD
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Re: Why is Home Part of NW

Post by GeoffD » Tue Oct 02, 2018 4:34 am

The Wizard wrote:
Sun Sep 30, 2018 9:58 pm
willthrill81 wrote:
Sun Sep 30, 2018 9:41 pm
The Wizard wrote:
Sun Sep 30, 2018 9:36 pm
What does Net Worth have to do with your ability to retire next year?
Very little.
What actually matters is: your level of Investible Assets...
So owning a home free and clear rather than renting an equivalent home doesn't matter in retirement?

I would rephrase it to say that what matters is whether you can produce an income sufficient to reliably meet your spending needs. Investable assets may or may not be part of that equation (e.g. Social Security, rental property, pension).
The income equation is what matters in retirement, correct.

But yes, some folks plan to sell their larger house and downsize to something in a LCOL area.
So they might include a portion of house value in Investible Assets.

Situations vary...
The way I look at it, it’s cash flow that matters in retirement, not income. When I do the math, I’m calculating “I can spend a COLA-protected $X.00 per year for the rest of my life and not run out of money.” My home equity isn’t used in that calculation because I’m planning to own the house forever and use it as my LTC policy if necessary. I’ll have a max Social Security check assuming I defer to age 70 which factors heavily in the math.

For me, net worth is something I calculate as an ego boost. I’m a millionaire! Lol From a lifestyle point of view, what matters is that I’m used to spending $X for my whole adult working life and if I stop working today at age 60, I have $Y per year to spend. When I was 50, the gap between those wasn’t pretty. At 60, it’s still some lifestyle adjustment so I continue to work.

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Re: Why is Home Part of NW [Net Worth]

Post by gotester2000 » Tue Oct 02, 2018 6:01 am

Steve723 wrote:
Mon Oct 01, 2018 8:02 am
Heh, what I did after reading countless threads on this topic is to simply take the value of my home equity and cut it in half for financial planning purposes. How is that for compromise?
I do this, except my rule is 30% over entire net worth. This is a buffer of 30% for mitigating unknown unknown type of risks.

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Re: Why is Home Part of NW [Net Worth]

Post by Jags4186 » Tue Oct 02, 2018 6:21 am

gotester2000 wrote:
Tue Oct 02, 2018 6:01 am
Steve723 wrote:
Mon Oct 01, 2018 8:02 am
Heh, what I did after reading countless threads on this topic is to simply take the value of my home equity and cut it in half for financial planning purposes. How is that for compromise?
I do this, except my rule is 30% over entire net worth. This is a buffer of 30% for mitigating unknown unknown type of risks.
Do you do this with your other assets? Stocks have dropped 25% in a day and 90% within 6 months. Do you discount your equity position 90% to mitigate known risks?

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2pedals
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Re: Why is Home Part of NW [Net Worth]

Post by 2pedals » Tue Oct 02, 2018 7:46 am

I think home equity can and should be part of your net worth. For the following reasons.
  • It can be sold
  • A reverse mortgage can be used
  • A home equity loan can be used against the equity
  • It can be rented
  • Ability to reasonably lock in expenses and lifestyles

But the following items may devalue your property over time.
  • Taxes
  • Maintenance
  • Disasters
  • Liens
  • Lawsuits
  • Homeowner Associations
  • Liquidity Risk
  • Interest Rate Risk
  • Market Risk
I would be conservative when adding real estate to net worth when planning, say 75-80% of market value.

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Re: Why is Home Part of NW [Net Worth]

Post by gotester2000 » Tue Oct 02, 2018 8:14 am

Jags4186 wrote:
Tue Oct 02, 2018 6:21 am
gotester2000 wrote:
Tue Oct 02, 2018 6:01 am
Steve723 wrote:
Mon Oct 01, 2018 8:02 am
Heh, what I did after reading countless threads on this topic is to simply take the value of my home equity and cut it in half for financial planning purposes. How is that for compromise?
I do this, except my rule is 30% over entire net worth. This is a buffer of 30% for mitigating unknown unknown type of risks.
Do you do this with your other assets? Stocks have dropped 25% in a day and 90% within 6 months. Do you discount your equity position 90% to mitigate known risks?
30% is for unknown unknown on total net worth - habit from managing estimates at work and it works great for me. I am not a only stock+bond guy to worry too much about the market. I also have real estate+gold along with them. You can plan to an extent, the rest you adapt to whatever happens.

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Re: Why is Home Part of NW [Net Worth]

Post by Youngblood » Tue Oct 02, 2018 8:34 am

FreemanB wrote:
Mon Oct 01, 2018 7:43 am
nisiprius wrote:
Mon Oct 01, 2018 7:12 am
I've never known what "net worth" is supposed to be good for, except for bragging. And quasi-bragging, letting financial institutions know some imprecise measure of how rich you are, and whether they can consider you "qualified" to buy into hedge funds and such.
I actually view it as an overall financial health progress indicator, personally. I suspect many people(Not on this board, but in general) who consider themselves well off financially would be quite surprised at how low their actual net worth is, once they weigh all of their assets and liabilities. In that sense, it gives at least a glimpse of your overall financial situation. It isn't as good as a detailed budget or other types of analysis, but its a fairly easy way to start. As for using it to brag, I suspect most people bragging about their net worth are also likely exaggerating it as well, or simply not including their liabilities. I've only discussed net worth with my wife when we hit a significant milestone, and even that was done jokingly.

This is how I have used net worth over the years. When calculated on the first of January each year you can see whether or not you are achieving your future financial goals. Then, you can did deeper to analyze where this increase or decrease came from and decide what you can or cannot change the following year.

I think for most people, that when they set a goal for themselves reaching it or getting closer feels good. Knowing you can afford to help your kids through college or retire as planned are just two examples. As others have expressed there are other ways of doing this and I am not saying this should be used in isolation.

YB
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Youngblood
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Re: Why is Home Part of NW [Net Worth]

Post by Youngblood » Tue Oct 02, 2018 8:35 am

and yeah, home equity is part of your net worth.
"I made my money by selling too soon." | Bernard M. Baruch

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Re: Why is Home Part of NW

Post by Artsdoctor » Tue Oct 02, 2018 9:13 am

celia wrote:
Mon Oct 01, 2018 1:30 pm
willthrill81 wrote:
Sun Sep 30, 2018 9:21 pm
Your net worth is all of your assets less your liabilities. Since a home is an asset, it belongs on the balance sheet.
+1
The value of your home is an asset.
But the remaining mortgage (principal still to be paid off) is a liability.

Calculating your net worth is one way to see if you are making progress from year to year. But if you are looking to retire, don't count the value of the house since you can't use it to buy food or pay medical expenses. You would need to be looking at liquid assets instead, the assets you could cash out at any time to use the money for spending.

Net Worth also matters as far as finding out the value of your estate. If your Net Worth is more than the Estate Tax exemption (currently $11 million) when you die, then you would owe Estate Taxes.
You're speaking like a true Californian! Indeed, although we pay plenty of taxes while living and working, it's actually a low-tax state when it comes to estate planning. Sometimes, it's ridiculously low (real estate passing to heirs, for example).

However, this is not the case in many states. Not only are there states with crazy estate tax brackets, there are even inheritance taxes based on your relationship to the decedent (and those differences can be significant). I've been surprised at how families don't find this out until the estate is settled; if one doesn't take a home value into consideration, your tax bill can be pretty striking.

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Re: Why is Home Part of NW [Net Worth]

Post by IRT » Tue Oct 02, 2018 9:33 am

Yeah, of course it's NW. Just calculate the net proceeds from a hypothetical sale...

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Re: Why is Home Part of NW

Post by TN_Boy » Tue Oct 02, 2018 9:46 am

celia wrote:
Mon Oct 01, 2018 1:30 pm
willthrill81 wrote:
Sun Sep 30, 2018 9:21 pm
Your net worth is all of your assets less your liabilities. Since a home is an asset, it belongs on the balance sheet.
+1
The value of your home is an asset.
But the remaining mortgage (principal still to be paid off) is a liability.

Calculating your net worth is one way to see if you are making progress from year to year. But if you are looking to retire, don't count the value of the house since you can't use it to buy food or pay medical expenses. You would need to be looking at liquid assets instead, the assets you could cash out at any time to use the money for spending.

Net Worth also matters as far as finding out the value of your estate. If your Net Worth is more than the Estate Tax exemption (currently $11 million) when you die, then you would owe Estate Taxes.
"since you can't use it to buy food or pay medical expenses"

As is often pointed out on this board, that statement is partly false ..... The equity in a house is one potential source of funds to pay for LTC expenses. A lot of people with paid off homes are sitting on enough equity to cover several years of assisted living. I realize that some people are convinced they will die peacefully at home thus they refuse to consider the potential use of home equity, but it's there and absolutely should be considered.

Though I agree that one should not consider home equity for their usual yearly expenses in retirement.

It is also true that knowing net worth is important for estate planning.

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Re: Why is Home Part of NW [Net Worth]

Post by 10YearPlan » Tue Oct 02, 2018 9:58 am

I think you already got your answer on why it is included (because NW is assets-liabilities and a home is an asset). And I do think NW is a useful metric.

That said, I think the more valuable metric that most people don't seem to talk about that much (outside of Bogleheads and similar forums) is Investable Assets. I never tracked it myself until a few years ago. So, now I track both. Because I do think having a handle on liabilities is important, and how big of a chunk real estate (and other non-liquid assets like art collections or fine jewelry or cars) is of your overall portfolio. I'd hate to have most of my net worth be real estate unless that real estate was income producing, for example. Or if I had a fine art collection worth a million dollars, that is meaningful of course, but I'd also consider whether I could liquidate and live off of the proceeds? Maybe. Maybe not.

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Re: Why is Home Part of NW [Net Worth]

Post by J295 » Tue Oct 02, 2018 10:42 am

One can always count on the tipping or house as net worth threads for robust dialogue

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Re: Why is Home Part of NW [Net Worth]

Post by inbox788 » Tue Oct 02, 2018 10:48 am

My short answer: Yes.
10YearPlan wrote:
Tue Oct 02, 2018 9:58 am
That said, I think the more valuable metric that most people don't seem to talk about that much (outside of Bogleheads and similar forums) is Investable Assets. I never tracked it myself until a few years ago. So, now I track both. Because I do think having a handle on liabilities is important, and how big of a chunk real estate (and other non-liquid assets like art collections or fine jewelry or cars) is of your overall portfolio. I'd hate to have most of my net worth be real estate unless that real estate was income producing, for example. Or if I had a fine art collection worth a million dollars, that is meaningful of course, but I'd also consider whether I could liquidate and live off of the proceeds? Maybe. Maybe not.
Do you start counting from zero or one? http://kilby.stanford.edu/~rvg/ordinal.html

Give me the answer on the count of 3. https://www.youtube.com/watch?v=vKePn-5 ... u.be&t=128

Is a 2nd home part of NW? How about a duplex that is half rented out? An investment property that is fully rented out? An investment property that is sitting idle (i.e. land in the middle of nowhere growing trees)?

Usually Investable Assets deals with more liquid personal financial assets than illiquid, but like you say, "Maybe. Maybe not.". It all depends on what you're counting and why. Accounting says equity = assets - liabilities. Not everyone is an accountant.

TravelforFun
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Re: Why is Home Part of NW [Net Worth]

Post by TravelforFun » Tue Oct 02, 2018 11:04 am

Net worth is not a meaningless number. I use it to gauge my finance progress.

Should home equity be included in the net worth number? Of course, yes. Say I have $1 million of investable asset, a $500k home on which I owe $300k, my net worth would be $1.2 million. Tomorrow I take out $300k from my investable asset to pay off my home my investable asset is now $700k but my home equity is $500k, and my net worth is still $1.2 million.

TravelforFun

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Re: Why is Home Part of NW [Net Worth]

Post by afan » Wed Oct 03, 2018 6:22 am

Net worth is a critical element in estate planning. How much will go to

A. heirs/charity?

B. How much to taxes?

How should you arrange your affairs to maximize the amounts that go to A and minimize what goes to B? If you really like taxes, you can include a bequest to the government. But you can only make a bequest with something you own.

You could not plan any of this without considering your networth.

The fact that a house may be illiquid and that the value may be volatile changes nothing.

Stocks are volatile but they are part of your networth. If you have a large position in low basis stock it may be illiquid as you avoid paying taxes by holding the asset.

Ownership in a privately held business is illiquid but the value counts in your financial situation.

If you own investment real estate it is both illiquid and volatile. Of course it counts in net worth.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

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Re: Why is Home Part of NW [Net Worth]

Post by Retired2013 » Wed Oct 03, 2018 7:21 am

Youngblood wrote:
Tue Oct 02, 2018 8:34 am
FreemanB wrote:
Mon Oct 01, 2018 7:43 am
nisiprius wrote:
Mon Oct 01, 2018 7:12 am
I've never known what "net worth" is supposed to be good for, except for bragging. And quasi-bragging, letting financial institutions know some imprecise measure of how rich you are, and whether they can consider you "qualified" to buy into hedge funds and such.
I actually view it as an overall financial health progress indicator, personally. I suspect many people(Not on this board, but in general) who consider themselves well off financially would be quite surprised at how low their actual net worth is, once they weigh all of their assets and liabilities. In that sense, it gives at least a glimpse of your overall financial situation. It isn't as good as a detailed budget or other types of analysis, but its a fairly easy way to start. As for using it to brag, I suspect most people bragging about their net worth are also likely exaggerating it as well, or simply not including their liabilities. I've only discussed net worth with my wife when we hit a significant milestone, and even that was done jokingly.

This is how I have used net worth over the years. When calculated on the first of January each year you can see whether or not you are achieving your future financial goals. Then, you can did deeper to analyze where this increase or decrease came from and decide what you can or cannot change the following year.

I think for most people, that when they set a goal for themselves reaching it or getting closer feels good. Knowing you can afford to help your kids through college or retire as planned are just two examples. As others have expressed there are other ways of doing this and I am not saying this should be used in isolation.

YB
+1

I do a Balance Sheet quarterly with the home listed for the past 20 yrs. We (DW) and I usually say "How did we get to were we are today!" The balance Sheet is just a snap shot of that time period but you can see the home listed for the purchase price with the mortgage. Then you can see the mortgage going down to zero. As my neighbors have sold over the years (identical houses by the same builder), I use their sale price as my current value.

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Re: Why is Home Part of NW [Net Worth]

Post by goodenyou » Wed Oct 03, 2018 9:57 am

My home equity will go to my heirs. It's value will be realized on their balance sheets when it is sold. The liquidity will have value to them.
"Ignorance more frequently begets confidence than does knowledge" | Do you know how to make a rain dance work? Dance until it rains.

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Re: Why is Home Part of NW [Net Worth]

Post by Jackson12 » Wed Oct 03, 2018 11:02 am

We don't include our home as part of our net worth. Perhaps thats a debatable stance in some areas of the country but homes appreciate slowly here, if at all, and they also lose significant value in some years. We still remember 2008. So coming up an accurate number for our home's value might be well off the mark if we want - or need - to sell.

A home is an asset, true, but one that isn't quickly made liquid...again, in our area. I've seen even decent homes in good neighborhoods sit on the market for quite some time. The home might be in good shape but the design simply doesn't appeal to buyers. Rooms may have strange layouts or the view may be unappealing (you can't move a highway or control the noise when outdoors). Even when the price drops, some homes are just difficult sells.

And we're trying to age in place, just as our parents did. One lived to 98, the other past 81 (heart condition) . We'll see. So we don't count our home as a usable asset and we don't plan to touch the equity. Not unless there are no other options. Or unless the costs of maintaining this home, paying real estate taxes , etc....become so expensive that moving is the best choice. From what we've seen in the past few years, we'd get a lot less house for a whole bunch more money if we sold.

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Re: Why is Home Part of NW [Net Worth]

Post by Nate79 » Wed Oct 03, 2018 11:32 am

A home is an asset with value. It is part of your net worth whether you count it or not. If not counting it you are just doing the calculation wrong.

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Re: Why is Home Part of NW [Net Worth]

Post by Abe » Wed Oct 03, 2018 11:53 am

I think there is some confusion between net worth and investable assets. Net worth is assets less liabilities. Your home is an asset so should be included in net worth. In calculating investable assets you do not include your home (principal residence) or personal properties such as a car.
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Re: Why is Home Part of NW [Net Worth]

Post by KyleAAA » Wed Oct 03, 2018 11:58 am

Because net worth is defined as assets - liabilities. Real Estate is an asset because it has economic value and is easy to convert into a cash flow.

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