Rules of Thumb: Max House Value as % of Net Worth?

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travellight
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Re: Rules of Thumb: Max House Value as % of Net Worth?

Post by travellight » Sat Nov 19, 2016 5:51 pm

^ hahaha, I meant the investment homes. Net worth with the pension is probably around 10 so I am hoping to not have to sell my two primary homes until my cats pass away as they can't possibly be moved. That may be at least ten years from now.

travellight
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Re: Rules of Thumb: Max House Value as % of Net Worth?

Post by travellight » Sat Nov 19, 2016 5:53 pm

p.s. My primary home is in California where Prop 13 keeps the property taxes in check.

protagonist
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Re: Rules of Thumb: Max House Value as % of Net Worth?

Post by protagonist » Sun Nov 20, 2016 2:00 pm

NYCguy wrote:At 25%, a retiree would spend more than 50% of their annual income on homeownership.


I suspect NYC is a special case here. Home ownership is probably much costlier (taxes, fees, insurance, cost of labor, etc) than many other parts of the country.

It is also hard to generalize about retiree income. My income is quite low since I am deferring SS, my IRA is (sadly) not the bulk of my portfolio, and I am in low cost index funds and CDs. For others with a lot of rental property and other investments, with large mandatory annual IRA withdrawals, their numbers would be very different.

Plus, depending on the size of a retiree's "nest egg" vs. expenses, percent of annual income may vary in relevancy.

protagonist
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Re: Rules of Thumb: Max House Value as % of Net Worth?

Post by protagonist » Sun Nov 20, 2016 2:08 pm

NYCguy wrote: I take it you're home is worth approximately $800,000: 5% x $800,000 equals $40,000. $18,000 is really inexpensive to operate such a nice house year over year. How much are your property taxes?


It's not.

I live in a college town in MA (MCOL?). My home is worth about $500K. Maybe a bit more now.

Taxes: about $5500/yr
Insurance: I forget, but I think about $700/yr
Utilities: A few thousand/yr (and MA gets cold in the winter!!)

I doubt if my home costs much more than $10-12K/yr (2%) to operate, including maintenance. Pretty much in line with this guy's expenses, percentage-wise. And it is a 130 year old Victorian in the Northeast with bad weather.

Carefreeap
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Re: Rules of Thumb: Max House Value as % of Net Worth?

Post by Carefreeap » Sun Nov 20, 2016 4:05 pm

NYCguy wrote:
travellight wrote:






travellight wrote: Ny taxes are 12k per year, insurance is 1600, Repairs averaged out over the years are about 4000/year (my guess as a padded estimate)..


Wow that seems really low to me for such an expensive property. My experience is limited to the rural northeast and metro New York. What is the experience of others with million dollar plus homes?




Similar situation. House value is probably around $1.5M, taxes about $7k (thank you Prop 13) insurance around $1,200/yr including a pro-rata share of our umbrella policy. Utilities (gas & electric, water, trash, tel & cable) about $3,600/yr. This is for a 1964 stick built house 2500 sq.ft. Living in a very mild climate makes a big difference in both utilities and repairs even if one is in a VHCOLA area. We've had no major repairs this year (knocks on wooden head) but since moving back into it 4.5 years after renting it out for 9 years we have been doing systematic renovations to improve our quality of life.

travellight
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Re: Rules of Thumb: Max House Value as % of Net Worth?

Post by travellight » Sun Nov 20, 2016 7:16 pm

Did you move, protagonist? I thought you were in NYC.

SQRT
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Re: Rules of Thumb: Max House Value as % of Net Worth?

Post by SQRT » Mon Nov 21, 2016 9:46 am

@NYCGuy. Your post of Nov 17 was excellent and exactly reflects my thinking(funny how that happens?). Your housing cost ratios seem reasonable to me and reflect our experience. Granted we maintain our places very well. The only addition I would make would be if someone has a sizeable pension entitlement they might want to incorporate that into their net worth for comparison purposes.

Our case: Our real estate represents about 20% of adjusted net worth (adjusted to include the NPV of my very generous pension). We have multiple homes and the cost of maintaining these are about 20% of our gross income(pension and divs) and about 25% of our after tax income. When I bought our last home in 2012, I was concerned that our total real estate expenses were reasonable when compared to our lowered income amount. Turned out fine but this pointed out that in retirement the opportunity cost of real estate is important so should be considered along with the actual out of pocket expenses. Does a retiree really want to spend 50% or more of his "income" on real estate? I wouldn't, so translating real estate value into a % of net worth, at least in retirement, can make sense. Two ways of looking at it.

NYCguy
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Re: Rules of Thumb: Max House Value as % of Net Worth?

Post by NYCguy » Mon Nov 21, 2016 12:30 pm

SQRT wrote:@NYCGuy. Your post of Nov 17 was excellent and exactly reflects my thinking(funny how that happens?). Your housing cost ratios seem reasonable to me and reflect our experience. Granted we maintain our places very well. The only addition I would make would be if someone has a sizeable pension entitlement they might want to incorporate that into their net worth for comparison purposes.

Our case: Our real estate represents about 20% of adjusted net worth (adjusted to include the NPV of my very generous pension). We have multiple homes and the cost of maintaining these are about 20% of our gross income(pension and divs) and about 25% of our after tax income. When I bought our last home in 2012, I was concerned that our total real estate expenses were reasonable when compared to our lowered income amount. Turned out fine but this pointed out that in retirement the opportunity cost of real estate is important so should be considered along with the actual out of pocket expenses. Does a retiree really want to spend 50% or more of his "income" on real estate? I wouldn't, so translating real estate value into a % of net worth, at least in retirement, can make sense. Two ways of looking at it.


Thank you. It does look like we think about these issues in a similar way. First, a couple of technical thoughts.

I haven't researched this topic in depth (because I don't have a pension unfortunately) here is how I think about pensions in the context of net worth and a retirement portfolio. Basically it is converting the annual income stream into a hypothetical portfolio of financial assets. For example if one has in $40,000 taxable pension income and one assumes a 4% long-term pretax, after inflation return on a portfolio, one would add $1 million of hypothetical financial assets to their net worth calculation.
Several of the responses in the past week have caused me to reconsider whether the cost of taxes, maintenance etc. can really be reduced to a percentage of home value. It is interesting that our experiences are similar and I do have a suspicion that people underestimate the real cost of homeownership and I also maintain our places to a very high standard, but my suspicion is the other posters are correct that the percentages vary widely by geography.

That conclusion doesn't cause me to despair that coming up with a meaningful rule of thumb for a maximum housing to net worth ratio is unattainable. All it means is that each person analyzing the application of the ratio to their situation needs to calculate the real cost of homeownership for their particular properties.

The maximum home value to net worth ratio is really another way of asking whether one is going to be house poor in retirement, which is another way of asking whether one is spending too much in maintaining expensive real estate such that you do no have enough other money to enjoy retirement. Is that in many ways will boil down to personal preference. Perhaps some retirees are happy spending 50 or 75% of the after-tax income maintaining their home. That preference would drive a much higher home to net worth ratio.

I am still in the accumulation phase of life but residential real estate represents 50% of my net worth, which is $12 million. My annual long-term cost of real estate ownership I estimate to be around $120,000. $6 million of financial assets invested at 4% pretax doesn't leave much left over after taxes and homeownership expenses.

I think it is likely that I would sell at least two thirds of my real estate in retirement in which case my ratios would be in line with yours.

Thinking about what is an appropriate maximum home to net worth ratio has benefited me in a couple of ways. First I recognize that if I leave my high-paying job, notwithstanding a substantial net worth, I will need to downsize my home. Second, it has caused me to focus on the fact that I need to increase my financial assets if I want to have the option to stay in my current home. What is daunting is that I would need to increase my financial assets to approximately $20 million in order to have your ratios.

It also has caused me to recognize I shouldn't be acquiring more real estate. Strictly as a diversification matter I'm not thrilled with the amount of money I have tied up in real estate. That said having my home has provided much happiness to me and my family and is a decent place to store and enjoy wealth.

I recognize that I am blessed financially and many other ways. Really thinking through these issues is part of what has helped me achieve financial success.
If your out-go is greater than your income, your upkeep will be your DOWNFALL.

corysold
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Re: Rules of Thumb: Max House Value as % of Net Worth?

Post by corysold » Mon Nov 21, 2016 1:08 pm

NYCguy wrote:
Thank you. It does look like we think about these issues in a similar way. First, a couple of technical thoughts.

I haven't researched this topic in depth (because I don't have a pension unfortunately) here is how I think about pensions in the context of net worth and a retirement portfolio. Basically it is converting the annual income stream into a hypothetical portfolio of financial assets. For example if one has in $40,000 taxable pension income and one assumes a 4% long-term pretax, after inflation return on a portfolio, [b][color=#0000FF]one would add $1 million of hypothetical financial assets to their net worth calculation. [/color][/b]
Several of the responses in the past week have caused me to reconsider whether the cost of taxes, maintenance etc. can really be reduced to a percentage of home value. It is interesting that our experiences are similar and I do have a suspicion that people underestimate the real cost of homeownership and I also maintain our places to a very high standard, but my suspicion is the other posters are correct that the percentages vary widely by geography.



I've no idea if that is the right way, but it sure makes me feel better when I do it.

SQRT
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Re: Rules of Thumb: Max House Value as % of Net Worth?

Post by SQRT » Mon Nov 21, 2016 1:56 pm

@NYCguy. Another excellent post, totally agree. It's not too difficult to determine the capitalized value of a non cola pension. Either get SPIA prices for your age and sex or estimate your likely actuarial age at death then use the appropriate interest rate to discount the pension receipts to present. In my case my pension pays full survivor benefits to my wife who is currently 59(I'm 66), so I need to take that into account. The SPIA value will likely be higher due to insurance co profit and admin costs. For either approach the NPV of the pension would likely be lower than your approach. SPIA payout rates for 59 year old female is higher than 4% thus the NPV would be lower, say 20 times the annual pension. For men my age payout is closer to 6% so NPV multiplier is the reciprocal or 16.6 times the pension amount. I use 20 times.

Agree that is is possible to be "house poor" in retirement even without a mortgage. This was my concern when I bought our last place. Maybe a percentage max of something like 25-30% (real estate value to total net worth) would prevent this for most people, but again will depend on your location and how much your lifestyle in retirement is real estate dependant. Some people just want to sit on the front porch and enjoy their home. Others have different ideas. Cheers.

BoricuaNY14
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Re: Rules of Thumb: Max House Value as % of Net Worth?

Post by BoricuaNY14 » Wed Oct 04, 2017 10:36 am

Trying to re-ignite this converstation with my question after reading the posts and Financial Samuri's posting.

In retirement, what % of our total networth should be our home equities?

Assume:
- retired with a pension that covers 80% of expenses while deferring social security to FRA. With SS, over 100% covered.
- Amount of equitiea increasing faster than investments.
- Avg. inflation 2.5%
- Mortgage on primary residence 3.375% and rental 4.25%
- Equity about $1M
- Pension worth $1.2M but not used in total network.
Should it be?

Concern: Are we diversified enough? As time goes by, it appears that the equity becomes a higher and higher percentage of Networth.

NYCguy
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Re: Rules of Thumb: Max House Value as % of Net Worth?

Post by NYCguy » Wed Oct 04, 2017 9:43 pm

BoricuaNY14 wrote:
Wed Oct 04, 2017 10:36 am
Trying to re-ignite this converstation with my question after reading the posts and Financial Samuri's posting.

In retirement, what % of our total networth should be our home equities?

Assume:
- retired with a pension that covers 80% of expenses while deferring social security to FRA. With SS, over 100% covered.
- Amount of equitiea increasing faster than investments.
- Avg. inflation 2.5%
- Mortgage on primary residence 3.375% and rental 4.25%
- Equity about $1M
- Pension worth $1.2M but not used in total network.
Should it be?

Concern: Are we diversified enough? As time goes by, it appears that the equity becomes a higher and higher percentage of Networth.
It would help if you were specific

1. How much equities, fixed income and what AA

2. What is the value and mortgage balance of your residence?

3. What do you mean by rental 4.25%?

4. What do you mean by Pension worth $1.2M but not used in total network?
If your out-go is greater than your income, your upkeep will be your DOWNFALL.

TheHouse7
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Re: Rules of Thumb: Max House Value as % of Net Worth?

Post by TheHouse7 » Wed Oct 04, 2017 10:29 pm

edge wrote:
Sun Jul 24, 2016 11:22 am
There is none. This is not a good question. Home affordability is normally about income and human capital vs. expense.
+1 This is silly. :?
"PSX will always go up 20%, why invest in anything else?!" -Father-in-law early retired.

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