Home value portion of net worth

[jIM_Ohio]

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!!)

Had you led with this post, I think this thread would give you better responses.


Are you working now?
what is your current budget?
why do you think you need to pay cash for second property?
can you write off mortgage interest on the second property?

Much of this is tax planning and weighing opportunity costs.

If the new property costs $350k and appreciates at 2% per year with X tax breaks
and the same $350k grows at 6% pre-tax in investment account

which is better?
or look for door #3

withdraw 70k, put that as DOWN PAYMENT on house
let other 280k still grow at 6%
finance 280k taking tax breaks along the way
then finance for 15 years or something like that...

[Beppington]

Had you led with this post, I think this thread would give you better responses.

Are you working now? what is your current budget? why do you think you need to pay cash for second property? can you write off mortgage interest on the second property? Much of this is tax planning and weighing opportunity costs. If the new property costs $350k and appreciates at 2% per year with X tax breaks and the same $350k grows at 6% pre-tax in investment account which is better? or look for door #3

withdraw 70k, put that as DOWN PAYMENT on house
let other 280k still grow at 6%
finance 280k taking tax breaks along the way
then finance for 15 years or something like that...

Yes, I started this topic badly. It wasn't until Steve's post about the value of your house in relation to total assets not really mattering that it hit me: Duh!

If I want to not have to work, it's the amount of liquid assets I have that matters, not the value of the house I live in (unless I'm willing to sell it, which is the opposite of my desire here)

[disneysteve]

If I want to not have to work, it's the amount of liquid assets I have that matters, not the value of the house I live in (unless I'm willing to sell it, which is the opposite of my desire here)

If your goal is to not have to work, then buying this property and building a new home would not move you closer to that goal. In fact, it sounds like it would move you quite far from that goal.

[jIM_Ohio]

If your goal is to not have to work, then buying this property and building a new home would not move you closer to that goal. In fact, it sounds like it would move you quite far from that goal.

This was my analysis/summary too...

not sure what OP is really trying to do

he posts once about some crazy hypothetical
he posts again about a specific housing situation
then he posts again about retiring early

he needs to read my signature
specific questions get specific answers
general questions get general answers
if you want a specific answer to a general question, go into politics or post more information and be up front/ forthcoming about what your goals and intentions are.

[Beppington]

This was my analysis/summary too...

not sure what OP is really trying to do

he posts once about some crazy hypothetical
he posts again about a specific housing situation
then he posts again about retiring early

he needs to read my signature
specific questions get specific answers
general questions get general answers
if you want a specific answer to a general question, go into politics or post more information and be up front/ forthcoming about what your goals and intentions are.

Ha-ha! Hey, it's just a discussion; When I posted my first question, I thought it was specific; I now know better. I'm not trying to be coy or elusive, just thinking this thing through & trying to ask the right question(s) the best way I can. I admitted in my last post that I didn't start this off very well. It's now clear to me that the value of my home in relation to my liquid assets is probably pretty meaningless. And, it's also now clear to me that spending liquid assets on real estate for personal use is probably not much different from spending on any other non-investment: It decreases the possibility of retiring early. Again, thanks to everyone with helping me understand ...

[jIM_Ohio]

Ha-ha! Hey, it's just a discussion; When I posted my first question, I thought it was specific; I now know better. I'm not trying to be coy or elusive, just thinking this thing through & trying to ask the right question(s) the best way I can. I admitted in my last post that I didn't start this off very well. It's now clear to me that the value of my home in relation to my liquid assets is probably pretty meaningless. And, it's also now clear to me that spending liquid assets on real estate for personal use is probably not much different from spending on any other non-investment: It decreases the possibility of retiring early. Again, thanks to everyone with helping me understand ...

I posted that tongue in cheek
You are participating in thread and I did not mean to demean, only to point out the humor.

For example- you have not truly stated your financial goal...
to be debt free...
to have a high net worth
to retire early
to be financially independent as young as possible

depending on your goal, the answer to the property question is different.

debt free- pay cash
high net worth- finance the new property, mortgage the original, then invest all available cash into something else (leverage)
to retire early- downsize current property and analyze investments
to retire early part b- do nothing???

see?

without a goal, any answer you get is going to be only a single data point which in random when compared to all other responses, if you have a known goal, the answers and questions we ask will get quite specific (and best suggestion is to start a new thread, state the goal, state the situation and see what you learn).

For example my #1 financial goal is to retire around the age of 53. EVERY financial move I make- buying a car or changing the budget, has that goal as the main priority when making the new decision. However others make different decisions, but they might have debt free being more important than not working...

[scfr]

Sorry I'm so late to this discussion. Going back to your original question, I know I'm in the minority, but I definitely do think it's a question with merit. I have pondered a similar question myself:

http://www.savingadvice.com/forums/personal-finance/38700-home-value-net-worth-retirement-2.html

Given my age and overall situation, and based on some Census Data I read, I decided 20% (home value as percentage of net worth) was a perfect number for me.

While there are many variables involved (age, high vs low cost of living area, etc) I see nothing wrong with coming up with a number that works for you. In fact I think it's a smart thing to do when you are thinking about buying.

I'm starting to ponder the question again (not about my home but about real estate in general) because I'm thinking about buying an investment property.

Good luck making your decision.

[feh]

One question that hasn't been discussed (at least I didn't see it) - where would you be pulling the money from to make the purchase? I wouldn't be pulling money out of the market right now to purchase a house.

[wincrasher]

I think it's more of an asset allocation issue. If you keep your old house, then you would be predominately in real estate. Not great from a diversification perspective. But if the land is a really great deal from an investment standpoint, then you may be overcommitted in real estate, but still a lower risk than stocks.

Personally, I'd get a mortgage and hang on to your cash. Rent out your old house and turn it into an income producer. Rates are at historic lows and you are in a great position to get approved and at the best rates. With the tax deduction, you are looking at borrowing at 3% or less net. Surely your investment portfolio is doing better than that.

[Beppington]

Sorry I'm so late to this discussion. Going back to your original question, I know I'm in the minority, but I definitely do think it's a question with merit. I have pondered a similar question myself:

http://www.savingadvice.com/forums/personal-finance/38700-home-value-net-worth-retirement-2.html

Given my age and overall situation, and based on some Census Data I read, I decided 20% (home value as percentage of net worth) was a perfect number for me.

While there are many variables involved (age, high vs low cost of living area, etc) I see nothing wrong with coming up with a number that works for you. In fact I think it's a smart thing to do when you are thinking about buying.

I'm starting to ponder the question again (not about my home but about real estate in general) because I'm thinking about buying an investment property.

Good luck making your decision.

The more I think about it, the more I'm convinced disneysteve is correct that it doesn't matter what your home's portion of your net worth is, as long as your liquid $ is sufficient to live your life the way you want.

[Beppington]

One question that hasn't been discussed (at least I didn't see it) - where would you be pulling the money from to make the purchase? I wouldn't be pulling money out of the market right now to purchase a house.

I would indeed be pulling some $ out of the market. I've given up trying to guess whether or not it's a good time to put $ in or take $ out of the market. When I used to try I was wrong about as many times as I was right.

Like now: I can't tell if the stock markets have been "low" long enough, & things are improved enough now, that the markets are going higher ... or is the approval of the Socialist health care system going to be enough to send the Dow to 4K.

[feh]

The more I think about it, the more I'm convinced disneysteve is correct that it doesn't matter what your home's portion of your net worth is, as long as your liquid $ is sufficient to live your life the way you want.

Yes, I agree with that statement also. Even if there was a magic number like 33%, I wouldn't suggest you own a $3 million house just because you're worth $10 million. That would be excessive.

On a related subject, though, I read somewhere that wealthy people (I don't remember how they defined wealthy...maybe it was just people w/ net worth over $1 million) have a much lower ratio than average folks do; something on the order of 33%. For the average American home owner, I imagine a very large percentage of their net worth is the equity they have in their home.

[feh]

I would indeed be pulling some $ out of the market. I've given up trying to guess whether or not it's a good time to put $ in or take $ out of the market. When I used to try I was wrong about as many times as I was right.

Like now: I can't tell if the stock markets have been "low" long enough, & things are improved enough now, that the markets are going higher ... or is the approval of the Socialist health care system going to be enough to send the Dow to 4K.

My crystal ball says the next 2-5 years will be very good for equities. Of course, I'm just another anonymous internet poster with an opinion.

Don't know why you think health insurance changes are going to tank the stock market...most changes won't occur for years, and private insurers are being handed 40 million new customers.

[Beppington]

I think it's more of an asset allocation issue. If you keep your old house, then you would be predominately in real estate. Not great from a diversification perspective. But if the land is a really great deal from an investment standpoint, then you may be overcommitted in real estate, but still a lower risk than stocks.

Personally, I'd get a mortgage and hang on to your cash. Rent out your old house and turn it into an income producer. Rates are at historic lows and you are in a great position to get approved and at the best rates. With the tax deduction, you are looking at borrowing at 3% or less net. Surely your investment portfolio is doing better than that.

You're right. Now I'm "in real estate" with only my house (an investment? I dunno) to the tune of ~25% of my net worth. If I buy the lot & build a new house on it, & keep the current house to rent out, I'd be in real estate to the tune of at least 80%.

[Beppington]

My latest problem: During our negotiations on price (using no real estate people), I determined by looking at comps that the lot's value should be ~272K. The sellers did the same but came up with 378K. They're focusing on this one single "comp" that sold at a price in '05 that I believe was much too high even during the "peak of the market".

The sellers then decided to hire an appraiser "to confirm their price", but it back-fired when their appraiser came back with 320K.

I agreed to come up to 320K, but they seem to have decided not to come down to it.

I should add that they weren't actively trying to sell the lot when I cold-called them out of the tax records/ phone book. They responded with, "We've talked it over & have decided we aren't ever going to build on it like we thought, so we're open to selling it. However, with the market downturn we're not anxious to sell right now."