Home value portion of net worth

**disneysteve** · 12-23-2009, 03:26 PM

That's an impossible question to answer. You need to look at it in terms of the max they should spend to purchase the home. The current value is irrelevant.

Here's why it is impossible. It depends how long they've owned the home and what the local real estate market has done. Before the bubble burst, many people saw their home values double or more in a very short time. Or someone like my mother who had been in her home for 51 years. It had appreciated more than ten-fold since she and my father purchased it. Did that make it "too much" for her to own?

What about people who live in a home that has been in the family for 2 or more generations? It could have been passed down to them and be worth way more than what they could otherwise afford. Does that mean they shouldn't live there or that it is worth "too much" for them? Of course not. So I don't see how you can assign an amount or percentage for what one's home ought to be worth, only what one ought to spend when purchasing a home.

**Beppington** · 12-23-2009, 03:49 PM

If your mother's home was now worth $995,000, and she had only $5,000 cash in the bank, but no debt, I would suggest she's not in a decent financial position. Do you agree?

Now, if her home has appreciated to say $750K and she has $250K in the bank, and no debt, she's probably fine.

In any case, if phrasing it your way helps, I'll ask: Imagine someone won $1M net, had no debt, and wanted to buy a house. What's the most expensive house you think he should buy?

**maat55** · 12-23-2009, 04:11 PM

Being that a home is an liability, my first impression is to say that the cost of insurance, taxes and upkeep should not exceed 30% of your income.

The value would not matter. What does matter is if the equity would be better put to use in another investment. Where I live, I would rather have an 250k house and 750k earning income.

**Beppington** · 12-23-2009, 04:57 PM

OK, here's my specific situation. I own my ~$225K home outright & have a net worth of $1M (debt free).

I'm considering buying a $320K piece of property and building ~$200K house on it. This would flip my house-to-net worth ratio from 22.5% to about 52%, & realistically probably 60-65% by the time it's all said & done.

I'm very secure/ comfortable with my 77.5% non-house net worth right now as a lot of it is in cash & mutual funds, but ~$250K is in a retirement account I can't reasonably touch for about 25 years.

So as you can see this deal would leave me with a pretty limited amount of accessible cash/ mutual fund money, probably about $100K after making a few tweaks here & there (aka selling toys).

If I did this then, I'd live in about a $625K home, have $250K in an inaccessible retirement account, and have about $100K accessible, but would either sell or rent out my current home.

In my current situation I feel like I'm really only working because I want to, not because I have to, and this deal would probably change that.

What do you think? Would you do it?

This new place is a very unique, awesome place, but is it worth trading my current situation for?

(p.s. maat55: I think disneysteve's mom, whose house has increased in value ten-fold, might argue with you as to whether or not her home is a liability! Man, that's the kind of liability I want!!)

**disneysteve** · 12-23-2009, 05:11 PM

Originally posted by Beppington View Post

Imagine someone won $1M net, had no debt, and wanted to buy a house. What's the most expensive house you think he should buy?

The amount you spend on a house should be based on your income, not your assets, so I'd say it should be no more than 3 times his income whatever that may be. He can't just go out and spend the $1M on a new house if he doesn't have the income to support that house, pay taxes, insurance, maintenance, etc.

**Beppington** · 12-23-2009, 05:15 PM

Originally posted by disneysteve View Post

The amount you spend on a house should be based on your income, not your assets, so I'd say it should be no more than 3 times his income whatever that may be. He can't just go out and spend the $1M on a new house if he doesn't have the income to support that house, pay taxes, insurance, maintenance, etc.

You're OK with having to work until retirement to pay for your house, when you don't have to, at least in my scenario?

What if the $1M winner decided to buy a $100K house and say "Know what, I don't feel like working ... any more." I think he could do it.

**disneysteve** · 12-23-2009, 05:17 PM

Originally posted by Beppington View Post

(p.s. maat55: I think disneysteve's mom, whose house has increased in value ten-fold, might argue with you as to whether or not her home is a liability! Man, that's the kind of liability I want!!)

Remember, that appreciation took more than 50 years to happen. That's a rate of return of less than 5%. There are plenty of investments that would have earned a lot more money over that time period. Plus, she had to pay taxes and insurance and make repairs and renovations over the years, so her actual return was far, far lower than 5%.

**disneysteve** · 12-23-2009, 05:19 PM

Originally posted by Beppington View Post

You're OK with having to work until retirement to pay for your house, when you don't have to, at least in my scenario?

What if the $1M winner decided to buy a $100K house and say "Know what, I don't feel like working ... any more." I think he could do it.

Depends. What is his income currently? How much does he have in savings? Would that 900K be enough for him to support himself and his family without working anymore? I couldn't retire on 900K today.

**Beppington** · 12-23-2009, 05:23 PM

Originally posted by disneysteve View Post

Remember, that appreciation took more than 50 years to happen. That's a rate of return of less than 5%. There are plenty of investments that would have earned a lot more money over that time period. Plus, she had to pay taxes and insurance and make repairs and renovations over the years, so her actual return was far, far lower than 5%.

I understand, but the issue is whether or not her house is an asset or a liability. What do you think it is?

I'd say someone who has little or no equity in their house has themselves a liability. I'd say someone who has a lot of equity built up in their house has an asset; granted an asset that will require some money to be put into to keep it, but an asset nonetheless. I was assuming that after 50 years your mom's house is owned outright.

**Beppington** · 12-23-2009, 05:28 PM

Originally posted by disneysteve View Post

Depends. What is his income currently? How much does he have in savings? Would that 900K be enough for him to support himself and his family without working anymore? I couldn't retire on 900K today.

He has $0 income & no job. He just has $1M in the bank and is buying a $100K house.

Wow, if you can't live on $900K in the bank with no income starting right now, I wonder if your lifestyle is too high:

- $900K sitting in a bank earning zero interest would allow you to withdraw $3,000 per month for 300 months (25 years).

- $900K sitting in a bank earning zero interest would also allow you to withdraw $5,000 per month for 180 months (15 years).

How are you livin'??

**disneysteve** · 12-23-2009, 05:44 PM

Originally posted by Beppington View Post

I understand, but the issue is whether or not her house is an asset or a liability. What do you think it is?

I think a house is an asset. It is a item that has monetary value. That makes it an asset in my book.

I do not think a house is an investment, however (talking about one's primary residence here, not a business property). I consider an investment something I purchase with the intent of making a profit and that is not why we purchased our house.

**disneysteve** · 12-23-2009, 06:07 PM

Originally posted by Beppington View Post

Wow, if you can't live on $900K in the bank with no income starting right now, I wonder if your lifestyle is too high

You aren't factoring in one's age, family size or current savings here. Does it matter if I'm single or married or have no kids or 5 kids? You also aren't accounting for geography. Do I live in a HCOLA? And don't forget about inflation. Just looking at a number - 900K - with no context doesn't really tell you anything.

Your comment made me pull up some numbers. This is just a rough accounting here but without even digging too hard, I easily came up with $25,000 in annual spending including just the following:
property taxes
home, auto and life insurance
utilities
medical insurance
college savings
synagogue dues
religious school tuition

That doesn't include things like gas, auto maintenance, food, clothing, travel, gifts, cell phones, home maintenance, charitable giving and many other things. Also, medical insurance would skyrocket if I was no longer employed since I'd have to buy my own coverage. So if we were starting with $0, could we get through the rest of our lives on $36,000/year? I suppose we probably could if we had to, but I certainly wouldn't want to. We certainly wouldn't be able to maintain our current lifestyle.

**jasonnoguchi** · 12-23-2009, 06:43 PM

If you have 1million in cash, the question you should be asking is "what exactly do you need" instead of taking a cash perspective, take a life perspective!

Its time to start living!

Anyways, i have a net asset value of about 10 million and real estates consist of 50%.

**cschin4** · 12-24-2009, 03:44 AM

What do you think? Would you do it?

This new place is a very unique, awesome place, but is it worth trading my current situation for?

I think it sounds like you are possibly reaching beyond your means and putting yourself in a risky financial situation. I also think a property or place that is "very unique" may be a red flag as well. And, in your scenario you are making a lot of assumptions in terms of either being able to buy or sell. There are some markets where things aren't selling and where there are not enough renters for properties. There are some markets where rentals are sitting empty, are underrented. And, being able to sell al property doesn't mean one is making a profit either.

Home value portion of net worth