Home value portion of net worth

[cschin4]

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'??

. I could live on $5K but that would be a simple lifestyle. $3K would be a bit tough as bills add up and it isn't too hard to hit that one.

[TBH]

I am in a very different situation from the OP, but I also worry about having too high of a percentage of my assets in my primary home. For a while, the equity in my primary home was more than half my net worth (and yes, I do count my primary home as an asset.) Now my other assets, mostly retirement savings, have grown and account for about 75% of my net worth.

I'm only in my 30s, and have a lot more years of work ahead of me. I don't plan on moving again (we're in our second house already) so I'm hoping the house continues to be a smaller and smaller part of our net worth, even as our equity in the house grows.

The reason I'm nervous about this is family history. Some of my relatives have sunk too much of their savings into their primary homes, and been too focused on paying off the mortgage, and wound up reaching retirement age with very little savings, and a big expensive paid-off house. Then they have to sell the house and move somewhere cheaper in order to retire. Or they can't sell the house, and they have to delay retirement until they can, sometimes taking a big loss and having a much reduced lifestyle. <Shudder> I am determined that when I get to retirement age, I'll have a paid-off house that is modest enough to continue to live in in retirement, and enough savings to maintain my lifestyle without having to sell my house.

[disneysteve]

Some of my relatives have sunk too much of their savings into their primary homes, and been too focused on paying off the mortgage, and wound up reaching retirement age with very little savings, and a big expensive paid-off house.

I think this is what Beppington was getting at. How much of your net worth is too much to have tied up in your home. I still say there is no right answer to that question.

To use the earlier example, let's say 900K saved is enough for me to retire. At that point, I don't see that it matters one bit if my home is worth 200K, 600K, 1M or any other amount. As long as I have enough assets outside of my home equity to cover my living expenses, what's the difference how much my home is worth?

[LivingAlmostLarge]

I couldn't live on $3k either. With medical bills, and no insurance for DH and I. We'd have to work. No one would insure us with our backgrounds.

$3k doesn't go far where I live either.

Anyway though why does it matter?

[Beppington]

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.

I realize now that $36K a year can be eaten up very quickly.

[Beppington]

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%.

Probably true, and I don't need much. I'm a pretty simple guy ... who is eyeing a $320K piece of land!

[disneysteve]

I realize now that $36K a year can be eaten up very quickly.

Yep. Median income in the US is about 50K so well more than half of the country earns more than 36K. That wouldn't go far at all in many places and certainly not if you have a family to support.

[Beppington]

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.

Yes, I realize "unique" can be trouble, and unique+expensive is probably even more trouble, so obviously I want to be very sure about this before signing on the line.

[Beppington]

I think this is what Beppington was getting at. How much of your net worth is too much to have tied up in your home. I still say there is no right answer to that question.

To use the earlier example, let's say 900K saved is enough for me to retire. At that point, I don't see that it matters one bit if my home is worth 200K, 600K, 1M or any other amount. As long as I have enough assets outside of my home equity to cover my living expenses, what's the difference how much my home is worth?

OK, that finally clicked in my head ... You're right, the home value doesn't really matter (except for maybe the higher maintenance/ insurance/ tax costs associated with a larger house/ property). The main thing that matters is how much liquid $ you have to live on, & for those OK with relying on income (which I like not having to do) what that income is likely to be.

Again, right now I have assets of about 775K in non-real estate, about 440K of which is very liquid/ fairly liquid. With no job, I think I could live for a very, very long time on that in my current no-debt situation. That 440K would drop to about 100K if I bought this property & built a house on it. Seems scary. But I'm only 41 & don't really have any plans to stop working any time soon; it's just very nice to feel pretty sure I could.

[cschin4]

Again, right now I have assets of about 775K in non-real estate, about 440K of which is very liquid/ fairly liquid. With no job, I think I could live for a very, very long time on that in my current no-debt situation. That 440K would drop to about 100K if I bought this property & built a house on it. Seems scary. But I'm only 41 & don't really have any plans to stop working any time soon; it's just very nice to feel pretty sure I could.

Bepp - It is difficult to say if that is right or wrong for you. It sounds like you handle your finances well and make good decisions and this could be one of them too. On the other hand, we also see that things can turn on a dime, that the economy can crash in a matter of days. As for being 41, you may be in good health now, but also realize that can change. My biggest concern would be developing health problems which would interfere with the ability to work. And, I wouldn't want to be in a position at this point in my life where owning my home looms in front of me. I am 45 and our home is paid off. In no way would I want to go back to having a mortgage, owing the bank and being in debt. If you can do this without putting yourself into 30 yrs of debt, then it may be reasonable for you to do so. Also, I like the security of having money in the bank and if you spend down most of your cash, you will be less liquid as well.
But, again, it might be a good investment too, who knows? Anyway, what is it that is unique and that you really like about the place? And, why do you want to move?

[Beppington]

Bepp - It is difficult to say if that is right or wrong for you ... Anyway, what is it that is unique and that you really like about the place? And, why do you want to move?

Well, crud, all good pts you make also. I was hoping there was a leaning towards me buying it, but it feels like the wise/ conservative thing for me is to not do it.

As for the unique-ness: It's in a rural neighborhood of all 10+ acre parcels that's <5 miles from an urban area with a grocery store strip & a new "green" neighborhood "town center" development. Even more appealing to me is that it's directly adjacent to a 700-acre prairie in conservation. So while I would own 17 acres, our view would be of 700+.

I understand this isn't for everybody, & it could be hard to sell if I had to.

[disneysteve]

Well, crud, all good pts you make also. I was hoping there was a leaning towards me buying it, but it feels like the wise/ conservative thing for me is to not do it.

Actually, I think you are young and your financial situation is quite good and this might be an opportunity you would later regret passing up. Sure, it is great to be 41 with a paid off home and lots of money in the bank, but unless your goal is to retire very early (which is sounds like it is not), I wouldn't see a problem with you doing this. Personally, I'd sell the existing home assuming market conditions would allow you to get a decent price but I don't have any desire to be a landlord. If you do, that's fine, too.

[Beppington]

Actually, I think you are young and your financial situation is quite good and this might be an opportunity you would later regret passing up. Sure, it is great to be 41 with a paid off home and lots of money in the bank, but unless your goal is to retire very early (which is sounds like it is not), I wouldn't see a problem with you doing this. Personally, I'd sell the existing home assuming market conditions would allow you to get a decent price but I don't have any desire to be a landlord. If you do, that's fine, too.

Now dangit Steve ... I think I had just about talked myself out of this thing!

I dunno, I need to dwell on it some more. I don't think I can stomach nearly wiping out my savings ... so in order to sleep OK I'll need to borrow some of the money. And, when I look at the cost of financing, especially in the early years of a loan ... yikes.


(Haha ... I accidentally typed "tears" instead of "years" in that last line; that would be more appropriate!!! "... especially in the early tears of a loan ... )

[am_vanquish]

Sounds like you got discouraged based on an over-exaggerated example. DisneySteve's comments were based on your hypothetical scenario, but it seems like your actual situation is quite different.

If you plan to continue working for at least another 15 years (approx. age 55), then what's the difference in using the income over those 15 years to pay down a mortgage or replace the "holes" left in your net-worth portfolio by purchasing the home in cash?

I agree that it's really a matter of prioritizing your personal preferences. If it were me, I'd buy the place (it sounds like you'd really enjoy it) by splitting the difference ... put down about 50% and finance the rest.

[Beppington]

Sounds like you got discouraged based on an over-exaggerated example. DisneySteve's comments were based on your hypothetical scenario, but it seems like your actual situation is quite different.

If you plan to continue working for at least another 15 years (approx. age 55), then what's the difference in using the income over those 15 years to pay down a mortgage or replace the "holes" left in your net-worth portfolio by purchasing the home in cash?

I agree that it's really a matter of prioritizing your personal preferences. If it were me, I'd buy the place (it sounds like you'd really enjoy it) by splitting the difference ... put down about 50% and finance the rest.

That does sound reasonable, I've just got myself probably a little too conservative these days. But, again, to answer your question, the difference is my having to pay many thousands in finance costs for borrowing that 50% ... vs not having to pay them by staying put. Oh, & my tax bill will go from about $1,500/ yr to about $8K.

I just have to make sure that this is really what I want to do & be able to commit to it.

Thanks to everybody for your thoughts on this, by the way ...