Should You Consider Your Primary Home a Part of Your Net Worth?

Today, in the Saturday Selection, Passive Income MD ponders whether or not a home is a good investment, and whether or not you should count it as a part of your net worth.

Note that these are two distinct questions, and the answer may not be the same for both of them. And the answer or answers may depend on the experiences you’ve had as a homeowner.

Personally, I don’t think of my primary home (or second home) as an investment in the traditional sense, but I do include any and all property as part of our net worth.

However, I don’t include our primary home as part of our retirement assets, and it doesn’t factor into our FIRE number. But the fact is, a home can be sold, and it is an asset that usually appreciates over time — of course, 10 years ago, we learned that’s not always the case.

Let’s see what PIMD has to say. This post originally appeared on his site.

 

Should You Consider Your Primary Home a Part of Your Net Worth?

 

Buying a home is a big deal – it’s one of the biggest and most emotional financial decisions you’ll make in your entire lifetime. Haven’t we all dreamt of the home we’d buy when we grow up?

When my wife and I neared the end of our medical training, discussions of where to live (and how many kids to have) began to arise. Like most people, our first home felt like the payoff for years of study and hard work; time for the good life to begin.

On the financial side of things, you’ve also likely heard that owning a home is the best investment you’ll ever make. But is that really the case?

 

Home Net Worth

 

Is a Home a Good Investment?

 

Robert Kiyosaki, author of Rich Dad, Poor Dad states that you’re better off considering your primary home as more of a liability – more of a consumption item than an investment. Why?

Yes, your monthly housing payment is going toward the equity of the home rather than rent. That’s a good thing. However, your primary home can be considered an illiquid asset. As some have said, “You have to live somewhere.” It’s also a liability in the fact that if you miss payments, the bank will take what’s theirs. And let’s face it – you’re not really treating that home like an investment property.

These aren’t the same kind of questions that occur to you when you’re picking out paint samples for your child’s nursery or renovating your dream bathroom.

 

Given All That, Should Your Home Actually Be Included in Your Personal Net Worth?

 

set for lifeWell, to answer that question, let’s back up a bit. Why does it matter? Who cares? Really, are you even tracking your net worth? I, for one, absolutely am, and I use a site called Personal Capital to help me track it. I used to use Excel spreadsheets and update them every month or two. I had to login to each account and look up all my numbers individually. Now I just login to one place and see realtime graphs, charts, allocations etc., all at once. Anything that saves me time is tremendously helpful.

Net worth is important because it’s like a scorecard. It’s kind of like some of the markers we follow in medicine. The absolute numbers are important, but what they mean in terms of clinical or real life significance is what makes those numbers powerful. Having an increasing net worth means that you’re increasing your assets versus your liabilities. That leads to ultimate long-term stability.

 

Okay Now, Should Your Home Be Included in Your Net Worth?

 

When it comes to qualifying as an accredited investor, one of the criteria is that you have a $1 million net worth excluding your primary residence. (As I’ve mentioned in previous posts, qualifying as an accredited investor can open up a huge world of investment opportunities, including great real estate crowdfunded deals.)

The thought is that you need to live somewhere and can’t easily liquidate or tap into the equity of your primary residence. However, I don’t fully agree with that. You can liquidate by selling your home on the open market, and you can definitely sell it faster if you’re willing to price it under market. In my market, I see homes closing in 14 days all cash easily, depending on the price. The same issue with liquidity can be said for any investment property, yet that is included in your net worth.

So I absolutely believe that if needed to, I could sell my primary home and use the current equity as cash if needed. I can’t think of too many scenarios where I would need that money that quickly but I know I could. On a side note, I have a HELOC setup, so I could always use that to tap into the equity of my home as well in a pinch.

 

My Net Worth

 

bankofamericaAfter all this talk, you may be wondering what my (Passive Income MD) net worth actually is. Well, including my home, I’m above $3 million. Without it, though, I’m in the upper $1 millions. I benefited from purchasing a home at a good time in the market and it’s appreciated greatly. So yes, my home is a huge part of my own net worth. That is, to an extent, a testament to the power of leverage. My only regret? I wish I could have bought the house right next to me at the same time.

My net worth goals do include my primary home. However, cash flow goals are my ultimate priority. Cash flow pays the bills and gives me the freedom to live life on my own terms. Even though my net worth is what it is, the cash flow I receive on a monthly basis is what allows for true financial independence. However like I mentioned, net worth is still a nice indicator to follow.

 

Do I Think My Home Was a Good Investment?

 

Oh absolutely yes. We bought our home in a fantastic location. I don’t need or want more space, our kids love it here, and we have a great community. Those are things that aren’t always easy to quantify in numbers, although some could play into the price of the home.

So, to answer the title of this post: Yes, I like to include my home in my net worth. I know exactly what my net worth is both with and without my home, but I base my goals on the former. I guess it also feels better and more secure to see that bigger number in my Personal Capital account.

 


Track your investments for free with Personal Capital. That's how I track the PoF portfolio.  

 

What do you think? Should you even care what your home is worth when it comes to net worth?

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27 comments

  • Vagabond MD

    I update my net worth monthly using an Excel spreadsheet. I add up all of the numbers from the various accounts and such. Then, as a separate line, I write in the Zillow value of my home, but never actually add the two numbers together.

    • I see two different numbers. 1. Retirement savings. 2. Net worth. There may be a large discrepancy, depending on where you live.

      Southern California vs. Northern Minnesota is obviously a huge discrepancy.

      Cheers!
      -PoF

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  • I consider my home value (minus the mortgage) as part of my net worth but I don’t mark to market, so it’s a static figure that only goes down because I’m making mortgage payments. So in that regard, it’s part of my net worth but since the equity portion doesn’t go up, it’s nothing more than a placeholder. I find that to be the most useful way to help me think about it’s place in our net worth.

  • I have decided to keep my equity as part of my net worth for 5 reasons:

    1) We are not in the home that we will FI in so when we do sell it that equity will be part of our FI strategy to either downsize in home or invest it all and rent.

    2) As mentioned above, I am call sell my home very quickly if needed. We have a pretty good amount of equity so I if I have to sell quickly it won’t be a problem financially. That money is ready to go, especially in hot DFW market.

  • Andrea

    We don’t yet own our primary residence (in the military and not sure where we’ll settle). This is a question my husband and I frequently discuss- when we do purchase a home, is it worth essentially liquidating our taxable account (right now we have it pegged as part of our retirement) to either put down a huge downpayment or buy the house outright if we have enough? Not sure if this is a good plan or if financing is a better option. We max out all our other retirement available accounts and contribute to 529 accounts for the kids and have over $300k in a taxable account that we plan to keep growing. The only caveat is right now it’s all in stocks (as part of a 70:30 retirement portfolio) so I’ll start a side account for the down payment so if the market is “down” at the time we won’t need to liquidate it and can finance.

    Is there a right or wrong answer to this question? My husband thinks it’s part of retirement but I’m more in line with it not being liquid… Would love some input!

    • Essentially this boils down to maths. If you finance a home and the interest rate is lower than what the stock market is returning then you’re better off doing that than taking your money out of the market to pay cash. This is a pretty low risk form of leverage.

      Plus, consider that if you liquidate a large taxable account to buy a home you will have to pay tax on your gains.

      • Andrea

        Thanks for the input. I didn’t quite take the tax implications into account. I guess we’ll see if ya worth it when the time comes and what interest rates are looking like at the time.

    • Tom

      Andrea,
      Great Q! I just retired from the military. Depending on how often you have to move will shape whether to buy. My wife & I created what we called our “Chateau” savings, renting below our means & saving on the side for our future house (which we moved into this month!). We invested that money in International bond funds; if we had to do it again, we’d simply put it in an S&P 500 fund. We also invested/invest 15% of our gross incomes for Retirement. We personally consider Retirement & Chateau separate. With respect to taxes, like Freedom Fiend mentioned, you could liquidate the taxable investments some each year to pay down the mortgage debt And minimize jumping to the next marginal tax bracket. How cool that you are doing so well together!

      • Andrea

        Thanks! That’s what I was leaning toward. Having retirement money separate from our “chateau” account as you put it! (I may steal that).

  • I don’t consider my home in networth since if I sell it I’d have to pay amounts similar to its opportunity cost for rent. I view it as a hegde against future rising inflationary liabilities.

    Then again I pay extra into my mortgage based on my safe asset allocation rates so I will note an inconsistency. This does however avoid trying to value my home.

  • I personally do not calculate the following in the net worth I truly keep track of:
    Primary home
    529 college accounts for my daughter.

    The net worth number I like to keep track of is the money I feel will provide a source of income during retirement which is really the only number that matters.

    Therefore my primary home even though paid off is not included (plus I don’t like to guess how much this asset is worth anyway because I could under or over estimate what I really would get for it if I had to) and I also don’t count the 529 as I expect that to be consumed for educational expenses before I retire.

    Sure I can include the other items (as well as jewelry car etc) to inflate the number as high as possible but that would only be for bragging rights which really don’t matter to me

  • I do not consider our house as an investment. Odds are, it will go up in value based on being located in a hot weekend getaway spot for two of the largest markets in the country. I do consider it as part of our net worth. It was last appraised in 2012. I do not keep up with its actual market value. Maybe I will have it appraised again in 5-6 years.

  • To me, I feel as if a home should be included in your “net worth” but I do like how you also “separated” the home out from your net worth as well in your post.

    Anything that can be liquidated can be included in your net worth, as long as you have someone willing to pay your something for it!

  • Lynne

    I count my farm as part of my net worth the same way any debts, if I still had them, would appear in a liabilities bucket. I figure if it can be sold, it’s part of the pot.

    Now most homes don’t generate income so they shouldn’t be included in the income calculations. That’s a distinction between net worth and cash flow.

    Additionally, most of us, myself included, do plan to downsize at some point, and therefore any excess equity remaining after moving to a new home will become part of one’s long term income planning.

  • Our house has been a bit of a mixed bag for us in terms of being an investment. There would be better ways for us to make money, but it has largely been money well spent. We overspent a bit though, which was a mistake that I wrote about recently. I count it in my net worth because I will likely sell it and free up a big chunk of money to invest for cash flow when my kids are out and we downsize. That said, I don’t count it in my FI reckoning because I would have to actually sell it and change my current lifestyle. We also don’t count our RESP (the beaver-pelt equivalent of a 529) since that is mission-based money for our kids.

    -LD

  • It almost shouldn’t matter, I think you should keep the percentage that your house represents of your total net worth well under 10% if possible. I realize for people who live in extremely high cost of living areas that might not be possible but because there is no way to insure that the value of a house will not crash at some point and not recover makes it a very very risky investment. It is like having that much money tied up in one company’s stock, maybe even riskier. Think Detroit, nobody knows which part of San Francisco might become the next blighted inner city but stranger things have happened.

  • Gasem

    I consider my house to be a minor liability. I own it free and clear but it is taxed every year and requires maintenance which pretty much adds up to appreciation and inflation so it’s probably a slight drag on my lifestyle. That being said it has served my family well. My houses value is about 4% of my portfolio’s value so as an asset it’s a little like holding undependable cash, it provides some kind of stability and it keeps me dry in a hurricane (at least so far). I do not include it in my net worth.

    Great topic

  • Yoma

    I count my home towards my net worth as my mortgage is already paid in full. And it is not much (I paid 260 for my home, with 20% down, paid off in 5 years, and today it is worth 300K. My net worth without it is 2M…

    But I do see what a drain a home is- always room to spend and always tax bills….

  • Yes (and Yes). A home can be a terrific asset if you choose one that doesn’t suck right out of the gates (i.e., one that needs a ton of repairs, or is poorly built, or lies in a flood plain, tornado alley, etc.)

    Try telling someone living on the street that a home isn’t an asset and see what they say.

    Practically, you can rent out a room or turn a portion (or all) of your home into an airbnb, if you’re really looking to crank on this asset.

    Friends of mine make serious hay by buying rehab properties, living in them for a few years while remodeling, then selling for huge profits. Homes are assets. all… day… long…

    They might require bucket loads of cash to buy and maintain, but heck, businesses (assets) fail all the time, and even our blessed equity investments can tank when you least expect it.

    Just my two cents. Seems like kind of an academic argument, especially when cash flow should be the focus for the FI crowd.

  • Todd

    Here’s why it should count:

    You have a $500k mortgage on a house worth $500k and you have $1mil in cash. You pay off the mortgage. Has your net worth suddenly dropped $500k? Of course not.

  • Robert Kiyosaki suggests having two copies of your balance sheet: one is the “bank” version. That would include all items of value, including a primary residence. Then there is the “rich dad” version. That includes assets that produce cash flow currently. I tend to do that. If I want a loan from a bank I would list my house since it is technically an asset. In reality, I will always live in a house and I don’t consider my residence as part of my investment portfolio.

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