What % of NW Should Be Wrapped Up in Your House?

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ilikeshreddingmail
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What % of NW Should Be Wrapped Up in Your House?

Post by ilikeshreddingmail »

I’m a prospective first time home buyer, and wanted to get a sense of how much of my NW should I have wrapped up in my primary residence. I understand I should keep monthly payments < 28% of my monthly salary, but with a decent amount saved up—how much should I put down? I know it’s common to put 20% down, but let’s say I want a somewhat nicer house, is it ok to put 30% or even 40%?

How much of my net worth should I have in my primary residence vs other assets (stock)?
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RickBoglehead
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by RickBoglehead »

Net worth has no correlation to house value as a purchase. Sure, value minus mortgage is in net worth.

A person in CA might need to buy a $1.5 million house, have a great salary, and $100,000 net worth. A person in the midwest may buy the same house for $500,000, and have the same net worth, and 1/3 the salary.

28% is conservative. You could use 35%.

The less you put down, the more gain, as a percentage, you may realize. I always put 20%.

A home may not provide a high return. Maybe slightly better than renting. Market should beat it. Maximize leverage. Interest rates are very low historically.
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by sailaway »

The answers are going to vary greatly at different life stages. Is "nicer" your own definition or by arbitrary criteria? It is one thing to be house poor for a home that check's your personal boxes and quite another to be house poor for a how home that doesn't function for you.
onourway
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by onourway »

I don’t see this as a particularly meaningful metric as it will vary substantially based on life circumstances. At a young age your house may tie up most of your net worth, at least temporarily, while as you age, it may, for some, reach a point where the value of the home is a trivial portion of one’s net worth. It’s more important to consider cash flow, liquid savings, impact to retirement or 529 savings, etc. in assessing the purchase.

Further, in this interest rate environment, an argument can be made that the only reason to put down more than the minimum is if it helps you sleep well at night. If you are looking at putting down more on a more expensive house in order to keep monthly cash flow comfortable, you still need to consider the bigger picture - more expensive houses are subject to more taxes, need more maintenance, and are often located in areas where you may feel pressure to own the nicer things your neighbors have.

In other words, there isn’t a rule of thumb to follow here. The details matter.
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JoeRetire
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by JoeRetire »

ilikeshreddingmail wrote: Sat Jul 17, 2021 3:06 am How much of my net worth should I have in my primary residence vs other assets (stock)?
Net worth shouldn't be a factor in purchasing a house.
Consider affordability and need instead. Buy what you can afford. Buy only as much home as you need.

If you can't afford to put down 20% of the house, you can't afford it.
Last edited by JoeRetire on Sat Jul 17, 2021 1:04 pm, edited 1 time in total.
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investingdad
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by investingdad »

I’m just repeating others, but it’s your ability to service the debt that matters. How easily can you handle the mortgage payment? That’s the metric I’d consider.
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by NabSh »

If you are just beginning your career, age in 20s/30s, and/or dont have 15-20X your annual expenses in your NW. Then my suggestion is to pay 20% down and rest is invested elsewhere ( and not tied to a single IL-liquid asset)
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by novemberrain »

JoeRetire wrote: Sat Jul 17, 2021 6:54 am For many first time home buyers, their net worth will become negative upon buying.
Doesn’t net worth remain the same when buying a home?

If my net worth is 100k and I put all that into buying a 300k home, my net worth is still 100k
(Except for closing costs)
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by KlangFool »

OP,

I only buy a house when

A) The PITI with 20% down payment and 30 years fixed rate mortgage is at least 20% to 30% lowered than market rent.

B) My portfolio is at least 2.5 times the house price. To buy a 400K house, my portfolio should be at least 1 million.

I survived multiple recessions and economy crisis across the world over 30+ years following those rules.

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Re: What % of NW Should Be Wrapped Up in Your House?

Post by catlady »

NabSh wrote: Sat Jul 17, 2021 10:00 am If you are just beginning your career, age in 20s/30s, and/or dont have 15-20X your annual expenses in your NW. Then my suggestion is to pay 20% down and rest is invested elsewhere ( and not tied to a single IL-liquid asset)
This is good advise.
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by NabSh »

KlangFool wrote: Sat Jul 17, 2021 10:29 am OP,

I only buy a house when

A) The PITI with 20% down payment and 30 years fixed rate mortgage is at least 20% to 30% lowered than market rent.

B) My portfolio is at least 2.5 times the house price. To buy a 400K house, my portfolio should be at least 1 million.

I survived multiple recessions and economy crisis across the world over 30+ years following those rules.

KlangFool
I think this is great advice.... Are you counting the down payment as part of the portfolio?
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by KlangFool »

NabSh wrote: Sat Jul 17, 2021 10:34 am
KlangFool wrote: Sat Jul 17, 2021 10:29 am OP,

I only buy a house when

A) The PITI with 20% down payment and 30 years fixed rate mortgage is at least 20% to 30% lowered than market rent.

B) My portfolio is at least 2.5 times the house price. To buy a 400K house, my portfolio should be at least 1 million.

I survived multiple recessions and economy crisis across the world over 30+ years following those rules.

KlangFool
I think this is great advice.... Are you counting the down payment as part of the portfolio?
No.

KlangFool
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59Gibson
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by 59Gibson »

Very difficult to measure during early and accumulating years. But with that said I think a goal of less than 20% at FI and/or retirement if house in paid in full.
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by JackoC »

novemberrain wrote: Sat Jul 17, 2021 10:23 am
JoeRetire wrote: Sat Jul 17, 2021 6:54 am For many first time home buyers, their net worth will become negative upon buying.
Doesn’t net worth remain the same when buying a home?

If my net worth is 100k and I put all that into buying a 300k home, my net worth is still 100k
(Except for closing costs)
Yeah, closing costs and the idea that you were presumably best bid in the market to get the house, so expected value of next best bid at T+1 day would be a lower. I also wonder though, even with transactions costs, which are significant for houses, several %, how that would make take 'many' first time buyers to negative NW at T+1 day. Perhaps if they started with much lower NW than $100k (in that example) and managed to put very little down.

Some gave rules of thumb for house v NW, others said the question defies widely applicable rules of thumb *relating only to NW*. I'd tend to the latter answer. I certainly wouldn't want the risk exposure younger people often take in highly bid up markets (like where I live). And a house *is* part of your asset allocation. People with high asset allocation to their house will realize how false 'my house is not an asset' is if that house drops 30% in value. For retired people with nice portfolio's and house is 5% of NW, it really doesn't matter if they incorrectly categorize the house.

But what you ideally want and the balance you have to reach in view of things like being close enough to a lucrative job in a highly bid-up areas, is not the same. 'Just get a job in a LCOL place' is the easy answer if you have a generic job. If you have a job with more upside but tied to a high cost place, it's not simple. The latter case is a small % of people in the whole country but an obviously disproportionate % here among threads on this general topic.
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by London »

So if your house appreciates quickly, you should sell to “rebalance” your house to net worth ratio?
sandan
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by sandan »

Its better to think of it in terms of total asset diversification (the sum of everything you own regardless of debt). Debt to asset ratio is a separate measure.

Personally, I plan on never having a single asset class account for over 55% my entire assets. There are too many uncertainties.
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JoeRetire
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by JoeRetire »

novemberrain wrote: Sat Jul 17, 2021 10:23 am
JoeRetire wrote: Sat Jul 17, 2021 6:54 am For many first time home buyers, their net worth will become negative upon buying.
Doesn’t net worth remain the same when buying a home?

If my net worth is 100k and I put all that into buying a 300k home, my net worth is still 100k
(Except for closing costs)
Yup. Not sure what I was thinking there... :oops:
Maybe in my head I was thinking "investable assets (net worth minus home equity)".

Still, "percent of net worth wrapped up in your house" shouldn't be a factor.
Just remember: it's not a lie if you believe it.
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by firebirdparts »

Infinity percent is fine. It’s a lifestyle cost.
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by MoonOrb »

I think you're asking "how big should my down payment be?" here. IMO: in most circumstances, as low as possible as long as you don't pay PMI. This puts aside questions of whether a larger downpayment/entirely cash offer is necessary to make a winning bid. So, assuming you don't need to need to make a bigger down payment to secure the bid, generally as low as possible as long as you're not paying PMI.
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by randomguy »

investingdad wrote: Sat Jul 17, 2021 7:08 am I’m just repeating others, but it’s your ability to service the debt that matters. How easily can you handle the mortgage payment? That’s the metric I’d consider.
The other part is your alternatives. Going to pay 3k/month in rent versus 2000 for house debt/maintence/... and and buying make a lot of sense. If you could rent for 1500 instead of 2000, you have to decide how much you value ownership and your expectations of rental inflation and market appreciation.
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by halfnine »

To diversify risk across asset classes (property/stocks/bonds) I would not want the initial equity in the home (20% down payment) to be more than 40% of my net worth.
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by 6bquick »

regardless of net worth. a dozen eggs, at my grocery store, has gone up 92% in the past 6 months. $0.77 -> $1.48. I'd put down the minimum to avoid PMI and finance the rest at sub 3% for 30 years, provided you can cashflow the payments.
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by Alto Astral »

One measure I've used is home price around 5x of your annual salary (excluding HCOL states such as CA, NY etc). I guess this is similar to the mortgage being ~30% of your salary.

I believe your question really is if you should have more equity in the house vs investing anything above 20%. I agree with a few others here that put the minimum downpayment and invest the rest.
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by Trader Joe »

ilikeshreddingmail wrote: Sat Jul 17, 2021 3:06 am I’m a prospective first time home buyer, and wanted to get a sense of how much of my NW should I have wrapped up in my primary residence. I understand I should keep monthly payments < 28% of my monthly salary, but with a decent amount saved up—how much should I put down? I know it’s common to put 20% down, but let’s say I want a somewhat nicer house, is it ok to put 30% or even 40%?

How much of my net worth should I have in my primary residence vs other assets (stock)?
I always purchase our homes 100% cash. Zero mortgage.

100% debt free.
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by babystep »

ilikeshreddingmail wrote: Sat Jul 17, 2021 3:06 am I’m a prospective first time home buyer, and wanted to get a sense of how much of my NW should I have wrapped up in my primary residence. I understand I should keep monthly payments < 28% of my monthly salary, but with a decent amount saved up—how much should I put down? I know it’s common to put 20% down, but let’s say I want a somewhat nicer house, is it ok to put 30% or even 40%?

How much of my net worth should I have in my primary residence vs other assets (stock)?
NW and equity in the home changes with time. I don't think that is how you want to think about it.

There are pros and cons of putting larger down-payments like 30% or 40%.

Pros: Your monthly payment goes down with larger down-payment. Your monthly cash flow is larger.

Cons: You liquidity goes down and hence if you need money in an emergency then it could be problem. Think about job loss beyond your EF and needing to make monthly payments on the house. If you had 20% down-payment instead of 40% then you can survive multiple years without job.

Also, there are other consideration about investing money as per your AA and market returns likely being higher than the mortgage interest cost etc.

If I was starting out then I would likely do 20% down and take 30 years mortgage right now and invest the rest of the money per the AA.
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by SQRT »

Really depends on your stage in life, when I bought my first house at 29, the equity was probably more than my total net worth. Now retired my personal use properties represent maybe 20% of our total net worth. The key, even at my age, is to ensure there is enough cash flow generated by my pensions and portfolio, to comfortably cover all expenses (including real estate costs).
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by NRB »

RickBoglehead wrote: Sat Jul 17, 2021 6:12 am Net worth has no correlation to house value as a purchase. Sure, value minus mortgage is in net worth.

A person in CA might need to buy a $1.5 million house, have a great salary, and $100,000 net worth. A person in the midwest may buy the same house for $500,000, and have the same net worth, and 1/3 the salary.

28% is conservative. You could use 35%.

The less you put down, the more gain, as a percentage, you may realize. I always put 20%.

A home may not provide a high return. Maybe slightly better than renting. Market should beat it. Maximize leverage. Interest rates are very low historically.

Is the 28%-35% based off gross income? Or post tax income?

Tia!
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by RickBoglehead »

NRB wrote: Sun Jul 18, 2021 9:59 am
RickBoglehead wrote: Sat Jul 17, 2021 6:12 am Net worth has no correlation to house value as a purchase. Sure, value minus mortgage is in net worth.

A person in CA might need to buy a $1.5 million house, have a great salary, and $100,000 net worth. A person in the midwest may buy the same house for $500,000, and have the same net worth, and 1/3 the salary.

28% is conservative. You could use 35%.

The less you put down, the more gain, as a percentage, you may realize. I always put 20%.

A home may not provide a high return. Maybe slightly better than renting. Market should beat it. Maximize leverage. Interest rates are very low historically.

Is the 28%-35% based off gross income? Or post tax income?

Tia!
28% gross income.

There is a rule called the 28/36 rule. 28% gross on housing, no more than 36% on total debt. Of course rules are meant to be broken. A 43% debt to income ratio is often used.
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by tibbitts »

RickBoglehead wrote: Sat Jul 17, 2021 6:12 am Net worth has no correlation to house value as a purchase.
+1
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by jajlrajrf »

A lot of what the "correct" answer is depends on how much you value owning a home. For some people, the world revolves around their owned house and the fact of owning it brings them great joy. For me, I could care less and view it as an annoying necessity.

Objectively, for anyone who is actively accumulating wealth and is aggressively saving and investing, a home is a bad investment(fn1)(fn2). It's illiquid, and it has ongoing maintenance costs that will probably exceed renting. So the generally correct answer (assuming you're not one of those people who loves owning real estate in and of itself) is "As little as possible." If you're living somewhere where owning a home is cheaper than renting, well, you have to live somewhere so get what you need. But don't take "owning is cheaper than renting" as a base assumption; many people, if they ran the actual numbers and not "assume no friction and no gravity" home ownership numbers, would be shocked at how much more they are paying to own than rent.

Part of the reason "buy a home" is part of so many people's financial advice is that for the average Jane or Joe who does not save enough and does not invest enough, home ownership is a sneaky way to (a) force them to save via equity and (b) get them to use cheap, relatively safe leverage. If you're actively managing your finances you are probably not one of these people, and could find a better use for your money.

fn1: The analogy I'd make here: some people make a ton of money by buying a home and selling it later, in an appreciated market! But that's the same as picking a lucky stock - plenty of people's homes appreciate at no more than the rate of inflation.
fn2: And I specifically mean bad financial investment. If you love your home and get enjoyment from owning it, that's a perfectly reasonable reason to put your money into it. It's just not the most efficient choice.
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by reader79 »

We are happy renters now, but our investor policy statement includes guidances on the percentage of our net worth that should be in our primary residence (should we choose to buy again). Our number is 15%. That means that a paid-off home should never exceed 15% of our net worth. So, if we have a $5M net worth, a $750,000 home would be at the top of our budget. A home is a terrible investment, which is why we try to maximize our exposure to income-producing assets (stocks, bonds, investment real estate) and minimize our exposure to non-income-producing assets (houses, boats).
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by Aged Maduro »

This chart may help to visualize how millionaires and multimillionaires allocate their net worth: https://www.visualcapitalist.com/chart- ... ke-wealth/

The average person allocates about 50% of their net worth to their primary residence. The average millionaire about 25%. The average decamillionaire about 10%. So the lower the better.

We currently have about 5% of our net worth tied up in home equity. I want as much of my net worth being allocated toward investment as possible, and i don't consider my primary residence to be an investment. It is a use asset and i don't want much of my net worth tied up in dead equity.
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ilikeshreddingmail
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by ilikeshreddingmail »

RickBoglehead wrote: Sat Jul 17, 2021 6:12 am Net worth has no correlation to house value as a purchase. Sure, value minus mortgage is in net worth.

28% is conservative. You could use 35%.

The less you put down, the more gain, as a percentage, you may realize. I always put 20%.
Thanks for your reply. What do you mean NW has no correlation to house value as a purchase? I shouldn't worry about NW when buying a house, but rather my income and the amount I can put down?
sailaway wrote: Sat Jul 17, 2021 6:20 am The answers are going to vary greatly at different life stages. Is "nicer" your own definition or by arbitrary criteria? It is one thing to be house poor for a home that check's your personal boxes and quite another to be house poor for a how home that doesn't function for you.
Thanks for the reply--by "nicer" I mean by my own definition. I don't plan to buy a larger/more extravagant house for the sake of it--I just want one that suits my needs, and makes my life convenient (where I have plenty of space, don't have to worry too much about maintenance, and still feels good).
onourway wrote: Sat Jul 17, 2021 6:33 am I don’t see this as a particularly meaningful metric as it will vary substantially based on life circumstances. At a young age your house may tie up most of your net worth, at least temporarily, while as you age, it may, for some, reach a point where the value of the home is a trivial portion of one’s net worth. It’s more important to consider cash flow, liquid savings, impact to retirement or 529 savings, etc. in assessing the purchase.

Further, in this interest rate environment, an argument can be made that the only reason to put down more than the minimum is if it helps you sleep well at night. If you are looking at putting down more on a more expensive house in order to keep monthly cash flow comfortable, you still need to consider the bigger picture - more expensive houses are subject to more taxes, need more maintenance, and are often located in areas where you may feel pressure to own the nicer things your neighbors have.

In other words, there isn’t a rule of thumb to follow here. The details matter.
Thanks for this great insight! I sounds as though I've been thinking about this the wrong way, and I should think of it more holistically, taking into account the impact to other financial goals.

It's good to know that my house may tie up most of my NW initially, so I shouldn't worry too much about asset allocation at this point it seems.
JoeRetire wrote: Sat Jul 17, 2021 6:54 am
ilikeshreddingmail wrote: Sat Jul 17, 2021 3:06 am How much of my net worth should I have in my primary residence vs other assets (stock)?
Net worth shouldn't be a factor in purchasing a house.
Consider affordability and need instead. Buy what you can afford. Buy only as much home as you need.

If you can't afford to put down 20% of the house, you can't afford it.
NabSh wrote: Sat Jul 17, 2021 10:00 am If you are just beginning your career, age in 20s/30s, and/or dont have 15-20X your annual expenses in your NW. Then my suggestion is to pay 20% down and rest is invested elsewhere ( and not tied to a single IL-liquid asset)
Thanks for the insight!
novemberrain wrote: Sat Jul 17, 2021 10:23 am
JoeRetire wrote: Sat Jul 17, 2021 6:54 am For many first time home buyers, their net worth will become negative upon buying.
Doesn’t net worth remain the same when buying a home?

If my net worth is 100k and I put all that into buying a 300k home, my net worth is still 100k
(Except for closing costs)
This makes sense--I suppose I'm more asking about asset allocation--how much of my NW should I have tied up in home equity (I know there will be fluctuations, depending on the housing market, putting in more money to pay off the loan, etc.). I suppose I wanted to get a sense of what % of my NW I should put in the down payment.
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ilikeshreddingmail
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by ilikeshreddingmail »

RickBoglehead wrote: Sun Jul 18, 2021 10:03 am
NRB wrote: Sun Jul 18, 2021 9:59 am
RickBoglehead wrote: Sat Jul 17, 2021 6:12 am Net worth has no correlation to house value as a purchase. Sure, value minus mortgage is in net worth.

A person in CA might need to buy a $1.5 million house, have a great salary, and $100,000 net worth. A person in the midwest may buy the same house for $500,000, and have the same net worth, and 1/3 the salary.

28% is conservative. You could use 35%.

The less you put down, the more gain, as a percentage, you may realize. I always put 20%.

A home may not provide a high return. Maybe slightly better than renting. Market should beat it. Maximize leverage. Interest rates are very low historically.

Is the 28%-35% based off gross income? Or post tax income?

Tia!
28% gross income.

There is a rule called the 28/36 rule. 28% gross on housing, no more than 36% on total debt. Of course rules are meant to be broken. A 43% debt to income ratio is often used.
Thanks for this insight!
jajlrajrf wrote: Sun Jul 18, 2021 12:26 pm A lot of what the "correct" answer is depends on how much you value owning a home. For some people, the world revolves around their owned house and the fact of owning it brings them great joy. For me, I could care less and view it as an annoying necessity.

Objectively, for anyone who is actively accumulating wealth and is aggressively saving and investing, a home is a bad investment(fn1)(fn2). It's illiquid, and it has ongoing maintenance costs that will probably exceed renting. So the generally correct answer (assuming you're not one of those people who loves owning real estate in and of itself) is "As little as possible." If you're living somewhere where owning a home is cheaper than renting, well, you have to live somewhere so get what you need. But don't take "owning is cheaper than renting" as a base assumption; many people, if they ran the actual numbers and not "assume no friction and no gravity" home ownership numbers, would be shocked at how much more they are paying to own than rent.

Part of the reason "buy a home" is part of so many people's financial advice is that for the average Jane or Joe who does not save enough and does not invest enough, home ownership is a sneaky way to (a) force them to save via equity and (b) get them to use cheap, relatively safe leverage. If you're actively managing your finances you are probably not one of these people, and could find a better use for your money.

fn1: The analogy I'd make here: some people make a ton of money by buying a home and selling it later, in an appreciated market! But that's the same as picking a lucky stock - plenty of people's homes appreciate at no more than the rate of inflation.
fn2: And I specifically mean bad financial investment. If you love your home and get enjoyment from owning it, that's a perfectly reasonable reason to put your money into it. It's just not the most efficient choice.
Thanks for this detailed post--helps me think about things in a different way!
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by getthatmarshmallow »

So much of whether the decision to buy or rent is local. When we bought, the house was about 1.6 times our annual income, and it was cheaper than renting a two bedroom apartment. NW wasn't a factor, and I don't think it should be in most cases.

The smaller your housing costs, the more resilient you are in crises. But NW doesn't have much to do with it.
Aged Maduro wrote: Sun Jul 18, 2021 2:40 pm This chart may help to visualize how millionaires and multimillionaires allocate their net worth: https://www.visualcapitalist.com/chart- ... ke-wealth/

The average person allocates about 50% of their net worth to their primary residence. The average millionaire about 25%. The average decamillionaire about 10%. So the lower the better.

Surely the causation runs the other way - after a certain point the decamillionaire gets little marginal value out of a bigger house, so their assets are held elsewhere. For the average household moving from 50% to 10% would mean a serious downgrade in life. Living in a van, and not the cute ones on Instagram either.
EnjoyIt
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by EnjoyIt »

ilikeshreddingmail wrote: Sat Jul 17, 2021 3:06 am I’m a prospective first time home buyer, and wanted to get a sense of how much of my NW should I have wrapped up in my primary residence. I understand I should keep monthly payments < 28% of my monthly salary, but with a decent amount saved up—how much should I put down? I know it’s common to put 20% down, but let’s say I want a somewhat nicer house, is it ok to put 30% or even 40%?

How much of my net worth should I have in my primary residence vs other assets (stock)?
If I understand correctly, you are asking how much of your wealth are you willing to put into 1 real estate asset such as your home.

My personal beliefs is that it should be no more that 33%. Better if it was about 20-25% but in a VHCOL (very high cost of living) area I can see as high as 40-50% mid way through one’s career.

If you want to be rich, then you should avoid buying too much house or sinking too much of your wealth into a single family home. Even if it is a home you live in.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
EnjoyIt
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by EnjoyIt »

EnjoyIt wrote: Sun Jul 18, 2021 8:55 pm
ilikeshreddingmail wrote: Sat Jul 17, 2021 3:06 am I’m a prospective first time home buyer, and wanted to get a sense of how much of my NW should I have wrapped up in my primary residence. I understand I should keep monthly payments < 28% of my monthly salary, but with a decent amount saved up—how much should I put down? I know it’s common to put 20% down, but let’s say I want a somewhat nicer house, is it ok to put 30% or even 40%?

How much of my net worth should I have in my primary residence vs other assets (stock)?
If I understand correctly, you are asking how much of your wealth are you willing to put into 1 real estate asset such as your home.

My personal beliefs is that it should be no more that 33%. Better if it was about 20-25% but in a VHCOL (very high cost of living) area I can see as high as 40-50% mid way through one’s career.

If you want to be rich, then you should avoid buying too much house or sinking too much of your wealth into a single family home. Even if it is a home you live in.
This strategy allowed us to reach financial independence in our mid 40s.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
neverpanic
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by neverpanic »

ilikeshreddingmail wrote: Sat Jul 17, 2021 3:06 am I know it’s common to put 20% down, but let’s say I want a somewhat nicer house, is it ok to put 30% or even 40%?
OK? Anything is OK if you can afford to do it.
onourway wrote: Sat Jul 17, 2021 6:33 am Further, in this interest rate environment, an argument can be made that the only reason to put down more than the minimum is if it helps you sleep well at night.
+1
RickBoglehead wrote: Sat Jul 17, 2021 6:12 am Maximize leverage. Interest rates are very low historically.
+++++1

There is no guarantee rates will ever be in this realm again. It could happen, but that feels unlikely over the next couple decades. It's a golden opportunity that can provide a generational benefit for the savvy, aggressive, and fortunate investor who might pay 20% over original budget for a home that then soars 100% in value over the next decade, while the home in the not-as-nice neighborhood only goes up 50% over the same time. This is all hypothetical, of course, but leverage is a tool you can use to improve your financial fortune by taking advantage of the opportunity when it's there.
I am not a financial professional or guru. I'm a schmuck who got lucky 10 times. Such is the life of the trader.
halfnine
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by halfnine »

The reason percent of NW has some validity is because if a recession hits and you lose your job you might not have enough liquidity to survive the downturn. So it shouldn't be completely discounted. Is there some magic percentage for everyone? Probably not. I've already indicated I would not want the initial equity in the home (20% down payment) to be more than 40% of my net worth. But there is certainly room for variance depending on one's circumstances. The other risk is having to much equity tied into your home means you'll have significant less money invested in the market.

Comparing monthly rental rates to PITI is also a myopic approach. Paying principal isn't an expense. Additionally, one might make 30 years of housing payments yet might make 50 plus years of rental payments. And the 30 year loan is fixed whereas rent is going to increase with rental inflation rates possibly doubling every 10 to 15 years.

Finally, houses in general are not money sinks. Homes are money sinks. But, obviously it is a very easy money sink to fall into, especially if you are married as I learned during my first rodeo.
Somethingwitty92912
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by Somethingwitty92912 »

ilikeshreddingmail wrote: Sat Jul 17, 2021 3:06 am I’m a prospective first time home buyer, and wanted to get a sense of how much of my NW should I have wrapped up in my primary residence. I understand I should keep monthly payments < 28% of my monthly salary, but with a decent amount saved up—how much should I put down? I know it’s common to put 20% down, but let’s say I want a somewhat nicer house, is it ok to put 30% or even 40%?

How much of my net worth should I have in my primary residence vs other assets (stock)?
It’s a consumption item. Buy as much as you need, nothing more.
Somethingwitty92912
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by Somethingwitty92912 »

neverpanic wrote: Sun Jul 18, 2021 9:12 pm
ilikeshreddingmail wrote: Sat Jul 17, 2021 3:06 am I know it’s common to put 20% down, but let’s say I want a somewhat nicer house, is it ok to put 30% or even 40%?
OK? Anything is OK if you can afford to do it.
onourway wrote: Sat Jul 17, 2021 6:33 am Further, in this interest rate environment, an argument can be made that the only reason to put down more than the minimum is if it helps you sleep well at night.
+1
RickBoglehead wrote: Sat Jul 17, 2021 6:12 am Maximize leverage. Interest rates are very low historically.
+++++1

There is no guarantee rates will ever be in this realm again. It could happen, but that feels unlikely over the next couple decades. It's a golden opportunity that can provide a generational benefit for the savvy, aggressive, and fortunate investor who might pay 20% over original budget for a home that then soars 100% in value over the next decade, while the home in the not-as-nice neighborhood only goes up 50% over the same time. This is all hypothetical, of course, but leverage is a tool you can use to improve your financial fortune by taking advantage of the opportunity when it's there.
I’d like to start by saying your not wrong.

But…. If you could predict the future you’d be super rich, holding a single illiquid asset such as a house is super frowned upon, and all real estate is local.

For these reason, I stand by my other post that says housing are consumption items, NOT investments!
Admiral
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by Admiral »

20 years ago we put down 40% on a $550k house.

Why did we put down this much? Several reasons. First, we had a lot of taxable cash. Second, interest rates were over 6%. Third, we wanted a low mortgage payment relative to our incomes so we could max retirement space, which we've done.

COULD we have made more by putting down 20% and putting the other 20% in the markets? Likely yes, but only because of the incredible rise in the markets. But, we are now in a position where we can retire in our late 50s and the home will be paid off. (We refinanced to a 15 year loan 5 years ago and will pay it off a few years early.) Our current rate is 2.25%.

The home is now valued at perhaps $850k, though we have no plans to sell. Our NW is around $1.8m.
Jags4186
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by Jags4186 »

It really has little to do with net worth and more about cash flow especially when young.

I like to work backwards from my income to determine my budget for things:

Let’s pretend you have a $100,000 gross income and take out the two largest chunks of expenses:

Less 20% taxes
Less 20% savings

That leaves you with $60,000 to live on. What do your day to day living expenses cost? Let’s say regardless of where you live, your personal expenses are $2500/mo (groceries, restaurants, gym membership, gas, car payment, netflix, medical, dental, etc.).

That leaves $30,000 remaining for mortgage, taxes, insurance, utilities, and maintenance. Let’s say 20% if that number goes towards utilities and maintenance. That’s $24,000 left for PITI. Now see what that gets you with a mortgage calculator and combine different amounts of down payment.

I recommend you go through this step to determine how much you can afford.

Keep in mind near term changes to circumstance. If you buy a home and 2 years later you have a child you all of a sudden just brought on significant child care costs. If you don’t leave enough wiggle room, quickly your savings drops to zero.
Admiral
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by Admiral »

Jags4186 wrote: Mon Jul 19, 2021 6:13 am It really has little to do with net worth and more about cash flow especially when young.

I like to work backwards from my income to determine my budget for things:

Let’s pretend you have a $100,000 gross income and take out the two largest chunks of expenses:

Less 20% taxes
Less 20% savings

That leaves you with $60,000 to live on. What do your day to day living expenses cost? Let’s say regardless of where you live, your personal expenses are $2500/mo (groceries, restaurants, gym membership, gas, car payment, netflix, medical, dental, etc.).

That leaves $30,000 remaining for mortgage, taxes, insurance, utilities, and maintenance. Let’s say 20% if that number goes towards utilities and maintenance. That’s $24,000 left for PITI. Now see what that gets you with a mortgage calculator and combine different amounts of down payment.

I recommend you go through this step to determine how much you can afford.

Keep in mind near term changes to circumstance. If you buy a home and 2 years later you have a child you all of a sudden just brought on significant child care costs. If you don’t leave enough wiggle room, quickly your savings drops to zero.
Good point. I would also say that you need to factor in the number of incomes in the household. Can you pay the mortgage on one income if you're in a dual income household? If you lose your job, and you're the only breadwinner, do you have sufficient savings to pay the mortgage? We've never taken a mortgage we could not pay on a single income, or at least made sure we had sufficient reserves to combine with one income to pay it.

Since we bought our home, our incomes have tripled. But our expenses have at least doubled (two kids vs one, private school, etc.)
EnjoyIt
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by EnjoyIt »

Jags4186 wrote: Mon Jul 19, 2021 6:13 am It really has little to do with net worth and more about cash flow especially when young.

I like to work backwards from my income to determine my budget for things:

Let’s pretend you have a $100,000 gross income and take out the two largest chunks of expenses:

Less 20% taxes
Less 20% savings

That leaves you with $60,000 to live on. What do your day to day living expenses cost? Let’s say regardless of where you live, your personal expenses are $2500/mo (groceries, restaurants, gym membership, gas, car payment, netflix, medical, dental, etc.).

That leaves $30,000 remaining for mortgage, taxes, insurance, utilities, and maintenance. Let’s say 20% if that number goes towards utilities and maintenance. That’s $24,000 left for PITI. Now see what that gets you with a mortgage calculator and combine different amounts of down payment.

I recommend you go through this step to determine how much you can afford.

Keep in mind near term changes to circumstance. If you buy a home and 2 years later you have a child you all of a sudden just brought on significant child care costs. If you don’t leave enough wiggle room, quickly your savings drops to zero.
We see this “how much house can I afford” threads all the time in this forum. I think people from VHCOL areas need to make your calculation if they want a home. I think if one wants to get wealthy it is the wrong question. The correct questions should be “what is the smallest house that satisfies our needs and some of our wants.”

Outside of getting lucky on home appreciation having too much house is financial suicide. There are only a handful of big financial mistakes that destroy the financial future of a high income individual. Too much house is second on the list right after wrong spouse/divorce.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
SQRT
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by SQRT »

Aged Maduro wrote: Sun Jul 18, 2021 2:40 pm This chart may help to visualize how millionaires and multimillionaires allocate their net worth: https://www.visualcapitalist.com/chart- ... ke-wealth/

The average person allocates about 50% of their net worth to their primary residence. The average millionaire about 25%. The average decamillionaire about 10%. So the lower the better.

We currently have about 5% of our net worth tied up in home equity. I want as much of my net worth being allocated toward investment as possible, and i don't consider my primary residence to be an investment. It is a use asset and i don't want much of my net worth tied up in dead equity.
Interesting link. Thanks for posting. I guess averages can be misleading though? There are virtually no reasonable houses for $1million in many VHCOL cities (SF, Vancouver, Toronto, NY, etc) so what would a decamillionaire do? Also, the cause/effect will go in both directions. That is, a person is much more likely to be a decamillionaire in VHCOL locations as his house would probably have appreciated significantly and form a large part of their Net worth. Anyway, interesting and useful.

In my case it looks like I might be “heavier than average” into real estate for my net worth. Probably because I have multiple homes in very expensive locations. If I lived in a low cost location, I would probably have one of the nicest houses in town but it would still be a very small percentage of my net worth. On the other hand, it would have been more difficult to generate a large net worth in such a place.

Based on previous threads here, I have found that, for retired people, many seem to have percentages in the 10-15% range. Again, the key is to have enough cash flow (portfolio, pensions,etc) to cover your desired lifestyle in retirement. For most retirees this will include the expenses associated with a comfortable, appropriate home. For a minority (myself included) it might include multiple homes. If I were to include just my principle residence, my percentage would be under 5%.
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by David Jay »

halfnine wrote: Sat Jul 17, 2021 3:36 pm To diversify risk across asset classes (property/stocks/bonds) I would not want the initial equity in the home (20% down payment) to be more than 40% of my net worth.
You have just prevented about 90% of families under age 30 from owning a home.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
EnjoyIt
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by EnjoyIt »

David Jay wrote: Mon Jul 19, 2021 8:51 am
halfnine wrote: Sat Jul 17, 2021 3:36 pm To diversify risk across asset classes (property/stocks/bonds) I would not want the initial equity in the home (20% down payment) to be more than 40% of my net worth.
You have just prevented about 90% of families under age 30 from owning a home.
One does not need to own a home to be happy or to be wealthy.

The less house one owns the wealthier they will get. Baring lucky home appreciation.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
halfnine
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by halfnine »

EnjoyIt wrote: Mon Jul 19, 2021 9:13 am
David Jay wrote: Mon Jul 19, 2021 8:51 am
halfnine wrote: Sat Jul 17, 2021 3:36 pm To diversify risk across asset classes (property/stocks/bonds) I would not want the initial equity in the home (20% down payment) to be more than 40% of my net worth.
You have just prevented about 90% of families under age 30 from owning a home.
One does not need to own a home to be happy or to be wealthy.

The less house one owns the wealthier they will get. Baring lucky home appreciation.
I haven't necessarily prevented anyone from buying a home I have just delayed them while preventing anything like 2007-08 ruining them. It also prevents them from being permanently house poor since if they can't save enough money to eventually buy a home under my criteria than it is also unlikely that they can save enough money while owning a home to sufficiently invest in equities and get out of being house poor.
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ilikeshreddingmail
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by ilikeshreddingmail »

EnjoyIt wrote: Sun Jul 18, 2021 8:55 pm
ilikeshreddingmail wrote: Sat Jul 17, 2021 3:06 am I’m a prospective first time home buyer, and wanted to get a sense of how much of my NW should I have wrapped up in my primary residence. I understand I should keep monthly payments < 28% of my monthly salary, but with a decent amount saved up—how much should I put down? I know it’s common to put 20% down, but let’s say I want a somewhat nicer house, is it ok to put 30% or even 40%?

How much of my net worth should I have in my primary residence vs other assets (stock)?
If I understand correctly, you are asking how much of your wealth are you willing to put into 1 real estate asset such as your home.

My personal beliefs is that it should be no more that 33%. Better if it was about 20-25% but in a VHCOL (very high cost of living) area I can see as high as 40-50% mid way through one’s career.

If you want to be rich, then you should avoid buying too much house or sinking too much of your wealth into a single family home. Even if it is a home you live in.
Thanks for the reply! How did you come up with the 33%? Also, when you mention "avoid buying too much house", I noticed a lot of bogleheads have the same thinking--that buying a house isn't necessarily always the best financial decision. I grew up thinking that renting is throwing away money, so this is new to me. Why do you think that buying too much house is bad?
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