What percent of net worth should a persons house be?

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FoolMeOnce
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Re: What percent of net worth should a persons house be?

Post by FoolMeOnce » Thu Oct 17, 2019 9:43 pm

renue74 wrote:
Thu Oct 17, 2019 9:15 am
mak1277 wrote:
Thu Oct 17, 2019 9:14 am
renue74 wrote:
Thu Oct 17, 2019 9:07 am

I always love the "can I afford this $1M house?" In my mind, I'm thinking, who in their right mind would want a $1M house?
I don't necessarily want a million dollar house, but I'd love to have a $300,000 house on $700,000 of land.
Haha....good. I'm with you there. $700K of land with the house right in the middle. No neighbors, no HOA, no city tax rate.
That'll get you a 25'x125' lot with 5' between houses in a good neighborhood in Chicago...

drawpoker
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Re: What percent of net worth should a persons house be?

Post by drawpoker » Thu Oct 17, 2019 9:44 pm

MathIsMyWayr wrote:
Thu Oct 17, 2019 9:31 pm
... not an investment. It has nothing to do with net worth.
Well, lenders would disagree with you.

When having to submit financial statement every year to keep credit line open the bank expects you to list current market value under assets and the current mortgage(s) balances under liabilities for your "personal residence".
For the purpose of, um, calculating, er, net worth.

drawpoker
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Re: What percent of net worth should a persons house be?

Post by drawpoker » Thu Oct 17, 2019 10:07 pm

masonstone wrote:
Thu Oct 17, 2019 5:37 am
......it keeps changing so I'd rather use net-worth measure. Also I'm 38 and will stay in this house till my kids (who are under the age of 5) finish high-school and possibly longer.
Huh? Will stay in this house until your pre-schoolers finish high school?

Then what's This about you will be moving soon :?: In the other thread you started.

Re: Good camera system to watch the babysitter
Post by masonstone » Wed Oct 16, 2019 6:18 pm

"It’s wireless because I don’t want to have a difficult install since we’ll be moving in a year or so."


"I'm thinking of upgrading my house...." Did you mean "I'm thinking of selling my house and buying something bigger and nicer...."
:?: :?: :?:
Last edited by drawpoker on Thu Oct 17, 2019 10:19 pm, edited 1 time in total.

marcopolo
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Re: What percent of net worth should a persons house be?

Post by marcopolo » Thu Oct 17, 2019 10:18 pm

drawpoker wrote:
Thu Oct 17, 2019 10:07 pm
masonstone wrote:
Thu Oct 17, 2019 5:37 am
......it keeps changing so I'd rather use net-worth measure. Also I'm 38 and will stay in this house till my kids (who are under the age of 5) finish high-school and possibly longer.
Huh? Will stay in this house until your pre-schoolers finish high school?

Then what's This about you will be moving soon :?: In the other thread you started.

Re: Good camera system to watch the babysitter
Post by masonstone » Wed Oct 16, 2019 6:18 pm

"It’s wireless because I don’t want to have a difficult install since we’ll be moving in a year or so."


:?: :?: :?:
Well it seems like OP is asking about how much house he can afford to buy. Presumably, that purchase (once they figure out how much house, shop for it, go through settlement, etc.) will result in said move in a year or so.
Then, perhaps, they plan to stay in the house they will have bought and moved into until their kids finish HS?
Once in a while you get shown the light, in the strangest of places if you look at it right.

drawpoker
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Re: What percent of net worth should a persons house be?

Post by drawpoker » Thu Oct 17, 2019 10:21 pm

Well, maybe so. But when people say "I am thinking of upgrading my house" it is usually taken to mean

I am thinking of making some major improvements/renovations/additions/ whatever to my house.

I wish people would speak more precisely....... :oops:

HEDGEFUNDIE
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Re: What percent of net worth should a persons house be?

Post by HEDGEFUNDIE » Thu Oct 17, 2019 10:35 pm

drawpoker wrote:
Thu Oct 17, 2019 9:44 pm
MathIsMyWayr wrote:
Thu Oct 17, 2019 9:31 pm
... not an investment. It has nothing to do with net worth.
Well, lenders would disagree with you.

When having to submit financial statement every year to keep credit line open the bank expects you to list current market value under assets and the current mortgage(s) balances under liabilities for your "personal residence".
For the purpose of, um, calculating, er, net worth.
Divorce attorneys and bankruptcy judges would disagree as well!

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2pedals
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Re: What percent of net worth should a persons house be?

Post by 2pedals » Thu Oct 17, 2019 11:36 pm

Determine the smallest percentage in an neighborhood that is acceptable for DW to live. Happy wife, happy life :D If you can afford that you are golden.

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AerialWombat
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Re: What percent of net worth should a persons house be?

Post by AerialWombat » Thu Oct 17, 2019 11:51 pm

I think this is a perfectly valid question, if one is a real estate investor. Every house I buy to live in is really just a future rental property — I have no “permanent” primary residence. I also have a target ratio between real estate equity and other investments.

If I was living like a normal person, like the OP, I wouldn’t include home equity in my portfolio calculation at all. I would simply be looking to minimize the monthly cost.
“Life doesn’t come with a warranty.” -Michael LeBoeuf

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Harry Livermore
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Re: What percent of net worth should a persons house be?

Post by Harry Livermore » Fri Oct 18, 2019 5:10 am

bgf wrote:
Thu Oct 17, 2019 8:33 am
I'm surprised on a BH forum so many people are saying it doesn't matter or that it matters little. that is, in my mind, insane.

this is a forum founded essentially on two axioms 1) diversify 2) cut costs.

from that, you should have as small a percentage of your net worth in your home as you find comfortable and reasonable. you want as much of your net worth as possible in the highest returning, most diversified assets, which for BHs is going to be your portfolio. similarly, we argue over 0.01% in expense ratios, and a home can cost you as much as 6% in transaction costs to sell, not to mention the time and emotional energy. the larger the percentage of your net worth, the more substantial those costs, financial and emotional.

i really am surprised. i think many people here realize their home is too large a percentage of their net worth, but there is little they can or are willing to do about it. the result is that they rationalize the situation.
I'm 100% with this poster. I agree with others that the useful metric is the traditional "monthly payment to income" ratio, but it's also really useful to think about home equity as it relates to net worth. Would you have 40% or more of your net worth in a single REIT?
In my case (9 years left on a 15-year mortgage) the equity in our primary residence is about 10% of our NW.
Cheers

Topic Author
masonstone
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Re: What percent of net worth should a persons house be?

Post by masonstone » Fri Oct 18, 2019 6:50 am

drawpoker wrote:
Thu Oct 17, 2019 10:21 pm
Well, maybe so. But when people say "I am thinking of upgrading my house" it is usually taken to mean

I am thinking of making some major improvements/renovations/additions/ whatever to my house.

I wish people would speak more precisely....... :oops:
I think part of your confusion is the generational gap. Younger folks would have understood upgrading ones home includes buying a newer better house as opposed to remodeling/expanding current house.

MrBeaver
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Re: What percent of net worth should a persons house be?

Post by MrBeaver » Fri Oct 18, 2019 8:06 am

Harry Livermore wrote:
Fri Oct 18, 2019 5:10 am
bgf wrote:
Thu Oct 17, 2019 8:33 am
I'm surprised on a BH forum so many people are saying it doesn't matter or that it matters little. that is, in my mind, insane.

this is a forum founded essentially on two axioms 1) diversify 2) cut costs.

from that, you should have as small a percentage of your net worth in your home as you find comfortable and reasonable. you want as much of your net worth as possible in the highest returning, most diversified assets, which for BHs is going to be your portfolio. similarly, we argue over 0.01% in expense ratios, and a home can cost you as much as 6% in transaction costs to sell, not to mention the time and emotional energy. the larger the percentage of your net worth, the more substantial those costs, financial and emotional.

i really am surprised. i think many people here realize their home is too large a percentage of their net worth, but there is little they can or are willing to do about it. the result is that they rationalize the situation.
I'm 100% with this poster. I agree with others that the useful metric is the traditional "monthly payment to income" ratio, but it's also really useful to think about home equity as it relates to net worth. Would you have 40% or more of your net worth in a single REIT?
In my case (9 years left on a 15-year mortgage) the equity in our primary residence is about 10% of our NW.
Cheers
I’m with this too. One thing I do when computing how much I’m paying for my current home, is to include opportunity cost of my equity, but not the principal. That is, if I have 100k equity on a 200k house, then my yearly living expenses might be:

Mortgage interest: 4k
Taxes: 5k
Insurance: 1.5k
Maintenance: 4k
Opportunity cost: 6k

Total ‘cost’ of living in the house: 20.5k/year, or $1700/month. Now this is different than cash flow required since you have to pay the principal amount out of cash flow, but the cost to net worth is really just the opportunity cost of not investing that principal more effectively.

Spending less on your home will positively impact your future net worth, unless doing so negatively effects your opportunity to earn additional income.

dekecarver
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Re: What percent of net worth should a persons house be?

Post by dekecarver » Fri Oct 18, 2019 9:19 am

As an expense our house is about 10% of our net worth.

gr7070
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Re: What percent of net worth should a persons house be?

Post by gr7070 » Fri Oct 18, 2019 9:24 am

MrBeaver wrote:
Fri Oct 18, 2019 8:06 am
Harry Livermore wrote:
Fri Oct 18, 2019 5:10 am
bgf wrote:
Thu Oct 17, 2019 8:33 am
I'm surprised on a BH forum so many people are saying it doesn't matter or that it matters little. that is, in my mind, insane.

this is a forum founded essentially on two axioms 1) diversify 2) cut costs.

from that, you should have as small a percentage of your net worth in your home as you find comfortable and reasonable. you want as much of your net worth as possible in the highest returning, most diversified assets, which for BHs is going to be your portfolio. similarly, we argue over 0.01% in expense ratios, and a home can cost you as much as 6% in transaction costs to sell, not to mention the time and emotional energy. the larger the percentage of your net worth, the more substantial those costs, financial and emotional.

i really am surprised. i think many people here realize their home is too large a percentage of their net worth, but there is little they can or are willing to do about it. the result is that they rationalize the situation.
I'm 100% with this poster. I agree with others that the useful metric is the traditional "monthly payment to income" ratio, but it's also really useful to think about home equity as it relates to net worth. Would you have 40% or more of your net worth in a single REIT?
In my case (9 years left on a 15-year mortgage) the equity in our primary residence is about 10% of our NW.
Cheers
I’m with this too. One thing I do when computing how much I’m paying for my current home, is to include opportunity cost of my equity, but not the principal. That is, if I have 100k equity on a 200k house, then my yearly living expenses might be:

Mortgage interest: 4k
Taxes: 5k
Insurance: 1.5k
Maintenance: 4k
Opportunity cost: 6k

Total ‘cost’ of living in the house: 20.5k/year, or $1700/month. Now this is different than cash flow required since you have to pay the principal amount out of cash flow, but the cost to net worth is really just the opportunity cost of not investing that principal more effectively.

Spending less on your home will positively impact your future net worth, unless doing so negatively effects your opportunity to earn additional income.
I couldn't disagree more with (some of) these views.

For starters, with this approach no one with a lower net worth could own a house in a HCOL area.

Some of us do not view our homes as part of our portfolio. Net worth, yes; portfolio, absolutely not.

None of us are truly maximizing our net worth opportunities. We all make lifestyle decisions on how to spend our money. Should I buy this car or that? Goodwill clothes or not? Do I want to live in this city? Do I want to buy a home? We ignore opportunity cost, we choose to sacrifice our net worth, or our financial Independence date to have a child, stay at home parent, or buy a house.

If one is meeting their retirement investing needs and their other personal finance needs then they can freely buy whatever house they can afford and do so without concern to their overall net worth as their *personal finance needs* will be met - which is the only reason ones net worth exists to begin with.
Last edited by gr7070 on Fri Oct 18, 2019 9:33 am, edited 2 times in total.

gr7070
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Re: What percent of net worth should a persons house be?

Post by gr7070 » Fri Oct 18, 2019 9:29 am

bgf wrote:
Thu Oct 17, 2019 8:33 am
I'm surprised on a BH forum so many people are saying it doesn't matter or that it matters little. that is, in my mind, insane.

this is a forum founded essentially on two axioms 1) diversify 2) cut costs.
Was it?

Or was it ultimately founded to enable people to meet their personal finance needs.

Also is that axiom you list with regard to their net worth or their investment portfolio, is a primary residence included in that by the founder explicitly.

You appear to be making assumption that might not be valid.

Topic Author
masonstone
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Re: What percent of net worth should a persons house be?

Post by masonstone » Fri Oct 18, 2019 9:45 am

MathIsMyWayr wrote:
Thu Oct 17, 2019 9:31 pm
A house is not an investment. It has nothing to do with net worth.
Of course its not an invest but the house you buy absolutely should be related to your net worth. A billionaire can buy a 200 million dollar house but a person with no assets should not buy a million dollar house.

SQRT
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Re: What percent of net worth should a persons house be?

Post by SQRT » Fri Oct 18, 2019 10:17 am

dekecarver wrote:
Fri Oct 18, 2019 9:19 am
As an expense our house is about 10% of our net worth.
As an expense? Why would you compare that to net worth? Maybe You meant total income? Or perhaps total value (of house)?

bltn
Posts: 580
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Re: What percent of net worth should a persons house be?

Post by bltn » Fri Oct 18, 2019 8:44 pm

KlangFool wrote:
Thu Oct 17, 2019 9:01 am
lostdog wrote:
Thu Oct 17, 2019 8:48 am
I think Klangfool had a system in place for this. Hopefully he'll chime in.

To answer your question I believe up to 20% is reasonable.

I also believe that home value should be part of your networth calculation. Especially if it's not your forever home and plan on selling in the future.
lostdog,

Let the house's purchase price = X. The net worth excluding the house needs to be 2.5 times or larger. So, it is 40% or lower.

KlangFool
KF,
Don t you mean net worth including the house? 2.5 x X total means X is 40% of the total.
bltn

KlangFool
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Re: What percent of net worth should a persons house be?

Post by KlangFool » Fri Oct 18, 2019 9:00 pm

bltn wrote:
Fri Oct 18, 2019 8:44 pm
KlangFool wrote:
Thu Oct 17, 2019 9:01 am
lostdog wrote:
Thu Oct 17, 2019 8:48 am
I think Klangfool had a system in place for this. Hopefully he'll chime in.

To answer your question I believe up to 20% is reasonable.

I also believe that home value should be part of your networth calculation. Especially if it's not your forever home and plan on selling in the future.
lostdog,

Let the house's purchase price = X. The net worth excluding the house needs to be 2.5 times or larger. So, it is 40% or lower.

KlangFool
KF,
Don t you mean net worth including the house? 2.5 x X total means X is 40% of the total.
bltn
No. I meant excluding the house. For a 400K house, you need 1 million excluding the house.

Klangfool

bltn
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Re: What percent of net worth should a persons house be?

Post by bltn » Fri Oct 18, 2019 9:16 pm

KlangFool wrote:
Fri Oct 18, 2019 9:00 pm
bltn wrote:
Fri Oct 18, 2019 8:44 pm
KlangFool wrote:
Thu Oct 17, 2019 9:01 am
lostdog wrote:
Thu Oct 17, 2019 8:48 am
I think Klangfool had a system in place for this. Hopefully he'll chime in.

To answer your question I believe up to 20% is reasonable.

I also believe that home value should be part of your networth calculation. Especially if it's not your forever home and plan on selling in the future.
lostdog,

Let the house's purchase price = X. The net worth excluding the house needs to be 2.5 times or larger. So, it is 40% or lower.

KlangFool
KF,
Don t you mean net worth including the house? 2.5 x X total means X is 40% of the total.
bltn
No. I meant excluding the house. For a 400K house, you need 1 million excluding the house.

Klangfool
I see.

m@ver1ck
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Re: What percent of net worth should a persons house be?

Post by m@ver1ck » Fri Oct 18, 2019 9:52 pm

fwiw - my home equity is about 750K on a 1M home.
Retirement funds and other stocks are around 1.2M.

This is just how the cards fell - did not plan for home to double in value in 10yrs.

KlangFool
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Re: What percent of net worth should a persons house be?

Post by KlangFool » Fri Oct 18, 2019 10:06 pm

m@ver1ck wrote:
Fri Oct 18, 2019 9:52 pm
fwiw - my home equity is about 750K on a 1M home.
Retirement funds and other stocks are around 1.2M.

This is just how the cards fell - did not plan for home to double in value in 10yrs.
m@ver1ck,

What was your net worth excluding the house when you buy the house? What was the purchase price of the house? This is the question that OP was asking.

KlangFool

randomguy
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Re: What percent of net worth should a persons house be?

Post by randomguy » Fri Oct 18, 2019 10:26 pm

drawpoker wrote:
Thu Oct 17, 2019 9:44 pm
MathIsMyWayr wrote:
Thu Oct 17, 2019 9:31 pm
... not an investment. It has nothing to do with net worth.
Well, lenders would disagree with you.

When having to submit financial statement every year to keep credit line open the bank expects you to list current market value under assets and the current mortgage(s) balances under liabilities for your "personal residence".
For the purpose of, um, calculating, er, net worth.
If you buy a house and rent it out, is it not an investment? Why if I rent my house to myself, would it not be an investment? The idea that a house isn't an investment makes no sense in a general sense. You make up special rules to exclude whatever investments you have from whatever calculations you are doing.

Now if a house is a good or bad investment is a different question. Some people make good money on their house investment. Others don't. And a lot pretty much break even.

Bobby206
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Re: What percent of net worth should a persons house be?

Post by Bobby206 » Fri Oct 18, 2019 10:28 pm

We are somewhere under 10% fwiw.

Trader Joe
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Re: What percent of net worth should a persons house be?

Post by Trader Joe » Fri Oct 18, 2019 10:50 pm

masonstone wrote:
Thu Oct 17, 2019 5:37 am
What percent of net worth should my house be? I'm thinking of upgrading my house and I don't want to use income as a measure since it keeps changing so I'd rather use net-worth measure. Also I'm 38 and will stay in this house till my kids (who are under the age of 5) finish high-school and possibly longer.
I do not count my house as part of my net worth. So, 0%.

EddyB
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Re: What percent of net worth should a persons house be?

Post by EddyB » Fri Oct 18, 2019 11:10 pm

((100)-(lesser of 64 or age))*(1/3)*((1/2*)(local COL index-average COL index))

COL index expressed as average=1, twice average=2, etc.

MathIsMyWayr
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Location: CA

Re: What percent of net worth should a persons house be?

Post by MathIsMyWayr » Fri Oct 18, 2019 11:59 pm

HEDGEFUNDIE wrote:
Thu Oct 17, 2019 10:35 pm
drawpoker wrote:
Thu Oct 17, 2019 9:44 pm
MathIsMyWayr wrote:
Thu Oct 17, 2019 9:31 pm
... not an investment. It has nothing to do with net worth.
Well, lenders would disagree with you.

When having to submit financial statement every year to keep credit line open the bank expects you to list current market value under assets and the current mortgage(s) balances under liabilities for your "personal residence".
For the purpose of, um, calculating, er, net worth.
Divorce attorneys and bankruptcy judges would disagree as well!
When money is tight, you cannot take a bedroom out and sell.

MathIsMyWayr
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Location: CA

Re: What percent of net worth should a persons house be?

Post by MathIsMyWayr » Sat Oct 19, 2019 12:04 am

masonstone wrote:
Fri Oct 18, 2019 6:50 am
drawpoker wrote:
Thu Oct 17, 2019 10:21 pm
Well, maybe so. But when people say "I am thinking of upgrading my house" it is usually taken to mean

I am thinking of making some major improvements/renovations/additions/ whatever to my house.

I wish people would speak more precisely....... :oops:
I think part of your confusion is the generational gap. Younger folks would have understood upgrading ones home includes buying a newer better house as opposed to remodeling/expanding current house.
Upgrading a housing means moving to a better, larger, or fancier house to me though I am not young. A major improvement/renovation/addition/ whatever to a house is re-modelling. I may be wrong.

HEDGEFUNDIE
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Re: What percent of net worth should a persons house be?

Post by HEDGEFUNDIE » Sat Oct 19, 2019 1:04 am

MathIsMyWayr wrote:
Fri Oct 18, 2019 11:59 pm
HEDGEFUNDIE wrote:
Thu Oct 17, 2019 10:35 pm
drawpoker wrote:
Thu Oct 17, 2019 9:44 pm
MathIsMyWayr wrote:
Thu Oct 17, 2019 9:31 pm
... not an investment. It has nothing to do with net worth.
Well, lenders would disagree with you.

When having to submit financial statement every year to keep credit line open the bank expects you to list current market value under assets and the current mortgage(s) balances under liabilities for your "personal residence".
For the purpose of, um, calculating, er, net worth.
Divorce attorneys and bankruptcy judges would disagree as well!
When money is tight, you cannot take a bedroom out and sell.
Of course not but you can downsize the whole thing.

Or rent out that room on AirBnb. There is a word for something you own that generates income for you - an asset.

MathIsMyWayr
Posts: 1139
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Location: CA

Re: What percent of net worth should a persons house be?

Post by MathIsMyWayr » Sat Oct 19, 2019 2:33 am

HEDGEFUNDIE wrote:
Sat Oct 19, 2019 1:04 am
MathIsMyWayr wrote:
Fri Oct 18, 2019 11:59 pm
HEDGEFUNDIE wrote:
Thu Oct 17, 2019 10:35 pm
drawpoker wrote:
Thu Oct 17, 2019 9:44 pm
MathIsMyWayr wrote:
Thu Oct 17, 2019 9:31 pm
... not an investment. It has nothing to do with net worth.
Well, lenders would disagree with you.

When having to submit financial statement every year to keep credit line open the bank expects you to list current market value under assets and the current mortgage(s) balances under liabilities for your "personal residence".
For the purpose of, um, calculating, er, net worth.
Divorce attorneys and bankruptcy judges would disagree as well!
When money is tight, you cannot take a bedroom out and sell.
Of course not but you can downsize the whole thing.

Or rent out that room on AirBnb. There is a word for something you own that generates income for you - an asset.
If we go that route, anything we value may carry an economic value. Jewelleries, kitchen stuffs, personal items, pets,,,. Even household members. We can send them out as wage earners. We should categorize assets - such as tier 1, tier 2,... with tier 1 for things readily convertible to cash such as bank accounts and typical investment, tier 2 such as investment real estate, and tier 3 for a residential housing,,,. They are not all equal,

SGM
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Re: What percent of net worth should a persons house be?

Post by SGM » Sat Oct 19, 2019 4:37 am

I don't keep track of total net worth as it is not useful to me. When I was young and first purchased a house I determined if I could afford the monthly payments. Interest rates were quite high in those days. Many years ago I spoke to an old coach and mentor who brought up his reaction to having paid off his mortgage. He bought when interest rates were low. He didn't party when he paid off his loan because his real estate taxes had gone up and were bigger than his mortgage payments had been. He lamented that people used to have mortgage burning parties back in the day.

I took over the financial reins for a relative in his 90s. The house was about 95% of his net worth. However, a good pension plus SS paid for most of his expenses near the end of life and supplied enough income for a very enjoyable retirement of 30 years. We sold the house when he could no longer live in it. We were fortunate to be able to move him into an excellent assisted living facility close to my home. Had he required even more nursing care the proceeds from the house sale would have paid for ten more years of expenses.

I generally don't go by any "rules of thumb". I consider them to be loose guidelines. Certainly they can be of great help to many individuals and I would not disparage the use of rules of thumb.

dekecarver
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Re: What percent of net worth should a persons house be?

Post by dekecarver » Sat Oct 19, 2019 6:38 am

Trader Joe wrote:
Fri Oct 18, 2019 10:50 pm
masonstone wrote:
Thu Oct 17, 2019 5:37 am
What percent of net worth should my house be? I'm thinking of upgrading my house and I don't want to use income as a measure since it keeps changing so I'd rather use net-worth measure. Also I'm 38 and will stay in this house till my kids (who are under the age of 5) finish high-school and possibly longer.
I do not count my house as part of my net worth. So, 0%.
I do the same, as I figure I need somewhere to live which is an expense. In terms of net worth, the initial cost of our house is about 10% our current net worth.

smitcat
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Re: What percent of net worth should a persons house be?

Post by smitcat » Sat Oct 19, 2019 8:19 am

MathIsMyWayr wrote:
Sat Oct 19, 2019 2:33 am
HEDGEFUNDIE wrote:
Sat Oct 19, 2019 1:04 am
MathIsMyWayr wrote:
Fri Oct 18, 2019 11:59 pm
HEDGEFUNDIE wrote:
Thu Oct 17, 2019 10:35 pm
drawpoker wrote:
Thu Oct 17, 2019 9:44 pm


Well, lenders would disagree with you.

When having to submit financial statement every year to keep credit line open the bank expects you to list current market value under assets and the current mortgage(s) balances under liabilities for your "personal residence".
For the purpose of, um, calculating, er, net worth.
Divorce attorneys and bankruptcy judges would disagree as well!
When money is tight, you cannot take a bedroom out and sell.
Of course not but you can downsize the whole thing.

Or rent out that room on AirBnb. There is a word for something you own that generates income for you - an asset.
If we go that route, anything we value may carry an economic value. Jewelleries, kitchen stuffs, personal items, pets,,,. Even household members. We can send them out as wage earners. We should categorize assets - such as tier 1, tier 2,... with tier 1 for things readily convertible to cash such as bank accounts and typical investment, tier 2 such as investment real estate, and tier 3 for a residential housing,,,. They are not all equal,

"If we go that route, anything we value may carry an economic value. Jewelleries, kitchen stuffs, personal items, pets,,,"
That would be accurate -- cars ,boats, jewelry, aircraft, artwork etc all have economic value and are part of your overall net worth.

Topic Author
masonstone
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Re: What percent of net worth should a persons house be?

Post by masonstone » Sat Oct 19, 2019 10:00 am

MathIsMyWayr wrote:
Sat Oct 19, 2019 12:04 am
masonstone wrote:
Fri Oct 18, 2019 6:50 am
drawpoker wrote:
Thu Oct 17, 2019 10:21 pm
Well, maybe so. But when people say "I am thinking of upgrading my house" it is usually taken to mean

I am thinking of making some major improvements/renovations/additions/ whatever to my house.

I wish people would speak more precisely....... :oops:
I think part of your confusion is the generational gap. Younger folks would have understood upgrading ones home includes buying a newer better house as opposed to remodeling/expanding current house.
Upgrading a housing means moving to a better, larger, or fancier house to me though I am not young. A major improvement/renovation/addition/ whatever to a house is re-modelling. I may be wrong.
Then I’m not sure why he got confused.

m@ver1ck
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Re: What percent of net worth should a persons house be?

Post by m@ver1ck » Sat Oct 19, 2019 10:07 am

KlangFool wrote:
Fri Oct 18, 2019 10:06 pm
m@ver1ck wrote:
Fri Oct 18, 2019 9:52 pm
fwiw - my home equity is about 750K on a 1M home.
Retirement funds and other stocks are around 1.2M.

This is just how the cards fell - did not plan for home to double in value in 10yrs.
m@ver1ck,

What was your net worth excluding the house when you buy the house? What was the purchase price of the house? This is the question that OP was asking.

KlangFool
When I bought the home / about 50% of my net worth was in the house. Down payment - 20% - was about 110K and was about 10 years of savings. 401K and Roth etc. probably had 200K or so. Bought this home in 2009.

However - we weren’t really thinking of it that way - I was not - maxing out 401K. I was just putting enough to get the company match and was doing the ROTH IRA instead. But priority was to save for a down payment.

m@ver1ck
Posts: 128
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Re: What percent of net worth should a persons house be?

Post by m@ver1ck » Sat Oct 19, 2019 10:08 am

KlangFool wrote:
Fri Oct 18, 2019 10:06 pm
m@ver1ck wrote:
Fri Oct 18, 2019 9:52 pm
fwiw - my home equity is about 750K on a 1M home.
Retirement funds and other stocks are around 1.2M.

This is just how the cards fell - did not plan for home to double in value in 10yrs.
m@ver1ck,

What was your net worth excluding the house when you buy the house? What was the purchase price of the house? This is the question that OP was asking.

KlangFool
When I bought the home / about 33% of my net worth was in the house. Down payment - 20% - was about 110K and was about 10 years of savings. 401K and Roth etc. probably had 200K or so. Bought this home in 2009.

However - we weren’t really thinking of it that way - I was not - maxing out 401K. I was just putting enough to get the company match and was doing the ROTH IRA instead. But priority was to save for a down payment.

MathIsMyWayr
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Location: CA

Re: What percent of net worth should a persons house be?

Post by MathIsMyWayr » Sat Oct 19, 2019 10:10 am

masonstone wrote:
Sat Oct 19, 2019 10:00 am
MathIsMyWayr wrote:
Sat Oct 19, 2019 12:04 am
masonstone wrote:
Fri Oct 18, 2019 6:50 am
drawpoker wrote:
Thu Oct 17, 2019 10:21 pm
Well, maybe so. But when people say "I am thinking of upgrading my house" it is usually taken to mean

I am thinking of making some major improvements/renovations/additions/ whatever to my house.

I wish people would speak more precisely....... :oops:
I think part of your confusion is the generational gap. Younger folks would have understood upgrading ones home includes buying a newer better house as opposed to remodeling/expanding current house.
Upgrading a housing means moving to a better, larger, or fancier house to me though I am not young. A major improvement/renovation/addition/ whatever to a house is re-modelling. I may be wrong.
Then I’m not sure why he got confused.
To upgrade means to go up to a higher grade, not to polish and shine the grade you are in.

renue74
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Joined: Tue Apr 07, 2015 7:24 pm

Re: What percent of net worth should a persons house be?

Post by renue74 » Sun Oct 20, 2019 8:13 pm

FoolMeOnce wrote:
Thu Oct 17, 2019 9:43 pm
renue74 wrote:
Thu Oct 17, 2019 9:15 am
mak1277 wrote:
Thu Oct 17, 2019 9:14 am
renue74 wrote:
Thu Oct 17, 2019 9:07 am

I always love the "can I afford this $1M house?" In my mind, I'm thinking, who in their right mind would want a $1M house?
I don't necessarily want a million dollar house, but I'd love to have a $300,000 house on $700,000 of land.
Haha....good. I'm with you there. $700K of land with the house right in the middle. No neighbors, no HOA, no city tax rate.
That'll get you a 25'x125' lot with 5' between houses in a good neighborhood in Chicago...
Hence while we'll never live in the Windy City. :sharebeer

getthatmarshmallow
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Re: What percent of net worth should a persons house be?

Post by getthatmarshmallow » Mon Oct 21, 2019 9:13 am

I don't find the question of net worth helpful with respect to housing, because for us its primary function is somewhere to live. Our equity in the house is also around 40% of our networth. We did not buy too much house, but we've benefitted from a hot market.

It makes more sense for me to consider the mortgage as a percentage of income, and figure the lower the better, balancing it with quality of life. We aren't wealthy by Boglehead standards but when your mortgage is 8% of your net pay you have a lot of space for extra savings and little luxuries.

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abuss368
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Re: What percent of net worth should a persons house be?

Post by abuss368 » Mon Oct 21, 2019 9:27 am

I always aim for as low as possible (so our portfolio is bigger).
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

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goingup
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Re: What percent of net worth should a persons house be?

Post by goingup » Mon Oct 21, 2019 9:43 am

As retirees, I suppose as we spend down our investable assets our home will become a bigger and bigger part of our net worth. This would be the natural progression of things. Right now our residence is about 20% of net worth.

novemberrain
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Re: What percent of net worth should a persons house be?

Post by novemberrain » Wed Oct 23, 2019 11:46 pm

When I am retired, I would like my paid off home value to represent less than 15 to 25% of my net worth. But I am still young and living in VHCOL area (Bay Area). At this point of my life, 15-25% is very difficult.

MichCPA
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Re: What percent of net worth should a persons house be?

Post by MichCPA » Thu Oct 24, 2019 1:12 pm

marcopolo wrote:
Thu Oct 17, 2019 5:12 pm


A few points:

1) From your username, it appears you are a CPA, so it may seem natural to you, but as a lowly engineer, using unrealized gains as a measure of income does seem phantom to me. Do most people even keep track of that?

[Me]- If you measure current price- price last year you have a change in unrealized gains

2) Surely, as a CPA you understand that the 4% rule is limited by SOR (real returns including bad sequence of inflation). That does not apply to a cash purchase of a house. For example, consider a $1M home purchase. Using a mortgage calculator, I see that $1M loan a4% requires P&I payments of $4774/mo, or $57,288/yr. Using the 4% guideline, that would require $1.432M set aside. Quite a difference, the price you pay for taking on portfolio SOR.

[Me] sequence of return risk is real, but 4% was built with that in mind. Most of the time 5% would work. (I don't recommend that).

3) Debt to income ratio seems to make a lot of sense in the context of someone paying monthly bills from a steady income. My unrealized gains vary quite a bit monthly and yearly, often being negative. How does one compute debt to income ratio based on that. I suppose you could average it out over some time period, more complexity, which brings me to my final point.

[Me] You definitely need to take a view on expected income over time. Are you expecting 6% nominal returns per year? I need to take a view on how much of my bonus I am going to get if I want a good view of my income. Its not an objective process

4) Let's consider a hypothetical situation (and by that, I mean the decision we just went through last year).

$6M Net Worth
Wish to withdraw $120K/yr from portfolio
Use 3% WR to be conservative since we retired our early 50s.

My simple-minded calculation was we needed ~$4M to fund the $120k/yr, so that left $2M we could afford to spend on our new home.
We actually planned for $1.25M, but it looks like it will come in closer to $1.5M when all is said and done. But, for the affordability analysis, let's use the $2M number. That would equate to a 33% of our net worth, which seems a bit high to me, but I am not sure I care because my desired expenses are covered with the remainder of the portfolio (as it is we will end up around 25% of net worth, with a little more cushion, <3% WR).
More to the point I have NO IDEA what my debt to income ratio is because I am not sure what the right way to compute my income is in this situation.

I guess if i use the SWR approach, I would have $180k to work with, using 33% Debt to Income would give me $60k/yr to finance a mortgage, or something around $1.05M as an affordable home. I guess that is a good as number as any. But, it would have unnecessarily constrained our options.

So, I would be curious to see how you would recommend that one go about computing how much house they could afford in this scenario using your "unrealized gains as proxy for income, then compute debt to income ratio" approach. One, to see if that arrives at a different number, and two to see how complicated the approach becomes to see if it is usable for us non-CPAs.

[Me]: So it looks like what you did was more related to income than assets. You took a view on the income you needed (with a good margin of safety) and set you budget based on excess assets. I like that approach. If you have a 30 yr mortgage on a $2m house, your required payment is about 115k at 4% and if you looked at 6% nominal growth that is 360k a year in gains. The 115/360= 32%. I would maybe be looking close to 30% so somewhere in the $1.9m range
See above

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