Should I Include My Primary Residence When Calculating Net Worth? The Case For Yes

House on cliff in SantoriniThere’s a debate raging whether one should include their primary residence or not as part of their net worth calculations. In my post, “The First Million Might Be The Easiest,” I exclude my primary residence in calculating my net worth figure at 28 because it is the conservative and most accepted way of calculating net worth.

The way to calculate your net worth is a personal preference where so long as you are netting out your liabilities from your assets you’re on the right path. Calculating the proper net worth is all about creating different scenarios that match your risk tolerance and financial goals as we’ve discussed in “How To Better Manage Your 401(k) For Retirement Success.”

It does seem strange to exclude what is likely our most valuable asset from our balance sheet. This post will argue why it’s absolutely fine to include our primary residence when figuring out how much we are worth.


To understand the fallacy of not including your primary home in a net worth calculation, we must first look at the perspective of the renter.

When a renter calculates his or her net worth s/he adds up assets such as:

* Cash

* CDs

* Stocks

* Bonds

* Retirement Plans

* Company equity share

* Cars

* Jewelry

* Pet Bunny

* Other Valuable Assets

And subtracts liabilities such as:

* Credit Card Debt

* Student Loans

* Car Loans

* Personal Loans

* Gambling Debt

* Alimony Payments

* Secret Lover’s Credit Card

* Outstanding Tax Liabilities

We do not include perpetual rent as a liability. If we wanted to do so we would simply “capitalize the expense of rent” by taking the annual rent and dividing it by current rental yield rates e.g. $24,000 a year in rent / 4% = $600,000. In other words, if someone was renting a $2,000 a month one bedroom forever, his or her liability would equate to roughly $600,000 at today’s rates. Sounds extreme, but we all know that the return on rent is alway -100% so there is truth to such calculation.

If we were to conduct this net worth exercise for renters, then we would be severely punishing the 20-34 year olds who are mostly renters given the average age for a first-time homebuyer in the US is around 35 years old. Can you imagine if the average 20-34 year old’s net worth was -$300,000, assuming there are $300,000 in assets to deflect the $600,000 liability? The US would be in full blown economic crisis mode with politicians and young protesters going crazy!


Now that we see the fallacy in capitalizing a renter’s rental expense in the form of a liability, we should be consistent with our thinking and not include the capitalized mortgage interest expense in a homeowner’s net worth calculations either. The only remaining variable between a renter and a homeowner is the homeowner’s home equity which is simply calculated by taking the estimated value of your home minus your mortgage. You can take a look at your home’s rough estimate online. I check at least once a week for fun as their algorithm updates 3X a week.

It makes no sense to one day have $100,000 in cash as part of your net worth, and then take a $100,000 net worth hit because you put down 20% for a $500,000 home. This is simply accounting, which everyone needs to understand especially those who are afraid of debt. I think the best mortgage amount is $1 million dollars on about $250,000 in income because of the tax benefits. Any larger mortgage or income amount and the benefits start getting phased out.

Some would balk at such a high debt figure, but that’s because they either don’t make a healthy amount of income, don’t understand tax law, or do not have alternative investments worth $1 million dollars or more that are earning higher than the mortgage interest amount. I’ve been doing my own taxes for over 10 years and meet such criteria. I strongly believe in such a ratio with the current tax regime and 10-year yield at roughly 2.8%.

Home equity can be extracted through a Home Equity Line Of Credit (HELOC), where interest on $100,000 can be deducted from your income if you use the HELOC “not to acquire, to construct, or substantially improve a qualified home” according to the IRS. The language is purposefully vague by the IRS so the average person can view such language as a green light to pay for a new car, college tuition, a 100″ LED TV, a vacation property, or new gold plated undies.

A bank’s goal is to get you to borrow as much as possible in order to earn an interest rate spread. The HELOC amount is largely determined by a Loan-To-Value ratio that goes no higher than 80%. In other words, let’s say you have a $1 million dollar home with a $500,000 mortgage. Your LTV is 50%. You may be able to get a HELOC worth $300,000 to bring your LTV to 80% because it’s $500,000 primary mortgage + $300,000 HELOC = $800,000 / $1 million. Banks pushed such HELOCs like crazy during the bubble and got burnt because many homeowners also went nuts and ended up not being able to pay back their debt.

If it was impossible to extract one’s home equity, then it would be more prudent to keep one’s home equity off the net worth calculation since it is not liquid. Better to be conservative and crystallize the value of your home after a sale then bake in lofty home equity figures which might not be therefore for draw down or investment purposes.


The “you’ve got to live somewhere” argument is the main sticking point for why we should not include our primary residence in our net worth calculations. Yet, given we do not penalize a renter by adding the capitalized rent liability, why should we take away the home equity of a homeowner? This would be inconsistent math.

Homeowners have on average a 40X greater net worth than renters for several reasons. One reason is the inclusion of home equity as part of such studies, whereas much of the common man does not. If you take out home equity and were able to “buy” a renter or a homeowner like a stock, you would obviously buy the homeowner all else being equal because you realize there is real value in home equity even though it is off balance sheet.

I will always bet on the long term wealth creation of a homeowner than a renter with the same amount of non-housing assets due to inflation. If you are always going to be a price taker, then you will always be paying more money over time. You’ve got to get on the right side of the equation by owning assets in an inflationary environment.


Figuring out how to calculate your net worth is a personal choice. Maybe you’re feeling a little depressed one day because you found out your friend from high school joined Facebook in 2005 and is now a multi-millionaire at the age of 30. Go ahead and inflate the value of your 1952 Topps baseball collection which includes Mickey Mantle’s $80,000 rookie card if it’s in near mint condition. Add back your primary home equity as well.

Or maybe you’re feeling like your managed stock portfolio is up an unsustainably absurd amount over the past several years, but you don’t want to sell because timing the market is a long-term losing proposition. Go ahead and remove your primary home equity in your net worth calculation to give yourself a buffer in case of a decline in stocks. It takes 30 seconds to come up with your home equity and add or subtract from your net worth dashboard on Personal Capital or in a spreadsheet.

The Chinese having a saying that if the direction is correct, sooner or later you will get there. The main purpose of tracking your net worth is to make sure you are focused and figure out ways in which you can optimize the various portions of your net worth. For example, with the 10-year bond yield rising from 1.6% to 2.8% in six months, you might consider allocating more of your net worth towards bonds and less towards stocks which recently hit all time highs. You might also consider offloading some of your real estate as well given higher rates means a decline in demand at the margin.

The single family residence in San Francisco I purchased in 2004/2005 cost more than my main rental apartment. If I want to feel richer, I will do mental accounting and pretend my apartment is my primary and my primary house is my rental. Instead, I just omit my existing primary residence from my net worth calculation to keep things conservative while keeping a second set of net worth calculations to include my primary home’s equity.

The more conservative you are with your net worth calculations, the higher the likelihood you’ll end up with more than you expected. No matter how poor or how rich you are everything is about expectations. If you can continuously underpromise and overdeliver, you are going to be one happy camper! Here is my recommended net worth allocation mix by age.


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* Manage Your Money In One Place: Sign up for Personal Capital, the web’s #1 free wealth management tool to get a better handle on your finances. You can use Personal Capital to help monitor illegal use of your credit cards and other accounts with their tracking software. In addition to better money oversight, run your investments through their award-winning Investment Checkup tool to see exactly how much you are paying in fees. I was paying $1,700 a year in fees I had no idea I was paying.

After you link all your accounts, use their Retirement Planning Calculator that pulls your real data to give you as pure an estimation of your financial future as possible using Monte Carlo simulation algorithms. I’ve been using Personal Capital since 2012 and have seen my net worth skyrocket during this time thanks to better money management.

Updated 2H2015

Photo: House on cliff in Santorini, FS.

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship. Sam focuses on helping readers build more income in real estate, investing, entrepreneurship, and alternative investments in order to achieve financial independence sooner, rather than later.

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  1. Lucas says

    A home is almost as liquid as your lending club loans. It would take a month or two to sell all of them and there are somewhat high costs associated with selling. I track sale cost of home (priced to sell within 1 month) minus a conservatively high estimate on selling/closing costs as part of my net worth because that is what I view as the liquid value.

    The higher the cost of housing in the area you live, the more important it is to include home equity as part of the picture. It is a higher percentage of your net worth and moving to a lower cost of living area and investing the difference is also an option.

    Also keeping track of your debt/networth, networth/expense, and networth/income ratios are very good indicators of your financial health and the risk you carry (and you need both home equity and home loan value to make these accurate).

    • says

      Sounds good to me. Although, an expensive home could still be the same percentage of net worth as someone with an inexpensive home given income and savings levels needed to support such respective homes.

      All those ratios are great to keep track of.

  2. says

    I’m in the process of finishing a post about this right now and we disagree.

    However, I’m fully on-board with your attitude about being conservative with net worth calculations.

    On a side note, I have family in SF and I love visiting, but it’s been many years now. They lived less than half a mile from Coit for a very long time, but have since moved.

    There’s some information you didn’t ask for.

  3. says

    We include ours in our net worth largely because it’s an asset that has a large liability against it. We wouldn’t be showing an honest picture if we showed one without the other and it seems quite irresponsible to omit our largest liability from the calculations.

    On the other hand, we don’t consider it “edible”, and by this I mean it’s not equity that we ever foresee ourselves tapping. Our HELOC is extended against an investment property and we have a lot of other opportunities for credit without turning to our personal home.

    • says

      Yep. Good way about looking at the hone’s liability as therefore a necessity in inclusion. You guys did a HELOC to buy one or two more rental props? If so, which do you plan to pay off first?

  4. says

    I include my home in calculating my net worth because a) This isn’t my “forever home”. Therefore, at some point in the next few years I will be selling. b) I believe I am currently underwater on my home. I want to keep track, since I could be selling soon, to know how that sell will overall affect my financial situation. I’ll likely owe money. But then again, if the market continues improving, I may walk away with a small amount of money. Either way, those situations will change my net worth (I don’t see immediately buying another home, but rather renting for a while), so I want to plan for them. Including my home, with negative equity, as part of my net worth allows me to see the entire picture, including how selling my home will impact my finances.

    • says

      The underwater angle is something I did not think about, and another reason to include a primary home as part of one’s net worth. We need as realistic an assessment of our net worth picture as possible. The good and the bad because personal finance is a journey that is hopefully progressing most of the time.

      Thanks for sharing!

  5. Money Beagle says

    The way I define net worth is what I would have if I sold my assets and paid my debts. Since the sale of my house (and payoff of the mortgage) would result in significant money here, the house *has to* be part of this calculation.

    My opinion is that if people say a home should not be part of your net worth, they aren’t looking at anywhere the same definition of net worth that I am. I’m not saying I’m right and they’re wrong in this case, but having studied economics and such for many years, I guess I’m pretty hardfast on where I stand.

  6. nbsdmp says

    Although fundamentally we disagree on having a mortgage if you have the cash vs. investing it to try and eek out that 3-4% difference, I think we agree that one should consider the value of their residence in their net worth calculations. If you put it in the context that you have a $1M paid for home in SF, that if you chose too out of economic necessity (not because you wanted to), you could sell that and live in a very nice $150k home in some town in TN/IA/wherever and live off the $850k. A home is a great hedge against inflation, and at the same time is one of the things that you spend money on that enriches your life (or is should at least).

    I don’t consider it in my net worth though when considering retirement…only from the expense side.

    • says

      Sometimes it can eek out a 30-50% difference if I’m lucky as demonstrated with the Chinese Internet stocks this summer. It’s a personal decision based on risk tolerance and goals.

      I will always maximize my tax shield and take advantage of government subsidies so long as they exist for one day they may not. They’ve been thinking of removing or lowering the $1 million mortgage indebtedness for years now. If and when they do, I will adjust accordingly.

      • Nbmpsd says

        I hear you, there is no argument that your math is correct & that it does make financial by the numbers to have a mortgage when cash is this cheap. I guess I already have enough other investments deployed that for me it makes me sleep better that instead of a $1m mortgage, I’ve got a paid for asset that nobody can ever take away from me…unless I don’t pay my taxes that is!

        • says

          Ha! Yes indeed, but actually don’t be so sure.

          Lots of countries have confiscated property from their citizens before. By having a large more, you become LESS afraid of the government and don’t mind them taking away your property as you funnel your cash to off shore accounts in Switzerland! Why do you think I took a business trip there this summer? To learn more about their ways!

  7. says

    Were I a homeowner, I would include my house in my net worth calculations. Add the value of the house, subtract the amount left that you owe on the mortgage.

    However, I’d prefer to divide my net worth into those assets that actively working to generate income (stocks, etc.) and those that are just sitting there (cash, savings accounts, home). This gives you a better idea of how much of your money is working for you and how much is just warming the bench.

    • says

      Sounds good to me. The activity of home equity is how much one saves not renting. Might not save anything in the beginning, but the savings starts becoming significant over time thanks to inflation and fixed rates.

  8. says

    Your home should be included in the net worth calculation. If you run out of money, you can sell the place and get some cash right?
    You just have to know that it’s not liquid and there’s probably better ways to make money than stashing it in your home.
    I probably should be more conservative with my net worth calculation and deduct commission and tax…

  9. says

    Your net worth is your total assets less liablities. If you have $1m in cash today you are a millionaire. However, the statement that if you buy a house tomorrow for $1m in cash, you are no longer a millionaire, seems a little ambiguous.
    The flip side is, if you include a property, should you include your cars, antiques, pictures, jewelry? If you exclude your main residence, do you exclude your holiday home that you rent out and that you bought as an investment/second home. Some people buy pictures, antiques and jewelry as items that they make use of, but that can be liquidated in times of need, and hopefully at a profit.
    It really boils down to who wants to know, your bank, your buddy, or the local friendly burglar.

    • says

      I think you include everything that has value and assign a conservative value to it.

      Well said on the last part. And to the IRS and property assessor’s office. Gotta look as poor as possible!

  10. says

    I think if you’re calculating net worth the equity you have in your home should be included. It’s value is non-negligible and can be tapped either through a HELOC or through a sale.

    That said, I wouldn’t include your home equity in any calculations to see if/when you can retire or meet certain other financial goals. But as a general picture of your net worth, I don’t see why it wouldn’t be included.

  11. B says

    I ‘feel’ that a $1m mortgage is too big for $250,000 in income. I have a $300,000 mortgage and about that income and with the extra money invest in income-producing assets (getting 10-30% yields). When it comes down to it, I just wouldn’t want the burden of that large of a mortgage on a personal residence, especially if your state does not have an anti-deficiency statute. I believe you that in terms of tax planning it makes sense, but when your mortgage is 2.4% on an FHA loan, the benefit seems minimal. I haven’t done the same analysis as you so maybe you can tell me I’m wrong then I can go buy a super fly house.

    I agree with you that there is a strong case to include your house in your networth. Like you, I keep 2 calculations – the one that includes just investments (which excludes personal property and the house) is where I judge my progress.

    • JayCeezy says

      B, pmfji, a rule-of-thumb for U.S. credit standards (pre and post 2005/6 bubble) is a 700+ credit score will qualify for a .28 income/mortgage ratio, and a .31 income/total debt ratio. The $1mm/$250K is a .25 ratio, a slam-dunk for obtaining a mortgage for a borrower with decent credit. Your feelings are to be respected, not long ago there were quite a few commenters on an FS blogpost that ‘explained’ why they defaulted on a mortgage; not one of the commenters admitted responsibility or considered that they may have taken on too much risk.

      • B says

        I am fortunate to have never been in a position to consider defaulted on a mortgage; however, I do not believe that a borrower has a moral obligation to continue avoid defaulting on a mortgage. Arizona, where I live, has an anti-deficiency chapter that protects borrower’s on a purchase money mortgage from liability for a deficiency (meaning the bank can’t sue the borrower for the difference between the amount owed on the note and the amount the bank collected in a foreclosure sale). Bank who do business in Arizona are fully aware of our anti-deficiency statute. In a sense, most mortgages in Arizona are l”non-recourse”. The bank took this risk knowingly. They have a qualified staff of underwriters and other employees who are paid to analyze risk. As such, banks are in a better position than 99% of borrowers to analyze and assume risk. If I were in the position that many of my friends were in, I would not feel like I violated a moral obligation if I elected to short sale my home. I would view it as a purely business decision. Sometimes reorganization is necessary. The anti-deficiency laws are drafted to protect consumers and they should not feel ashamed to use them.

    • says

      It’s a personal preference. A $1 million dollar mortgage only costs $30,000 a year in interest that is fully deductible at 3%. If you are bringing home $20,000 a month gross, is 1/7th your income in deductible interest really a burden? $20,000 is about $14,000 after taxes a month. More than enough money for me in SF.

  12. says

    I definitely include my mortgage in my calculation of net worth in order to get an accurate estimate of net worth. In my case, it’s a huge liability so my net worth would be way off if I didn’t include it.

  13. says

    Primary should be counted especially for those who put a large down payment. You don’t lose it when you purchase the home. Also when budgeting you include the mortgage payment as a cost. I highly doubt those who argue against counting your home in your net worth would be willing to walk away from the equity.

  14. says

    If you want your net worth to be your assest – liabilities, you need to include your home (equity) in the equation. Sure, discount the price a bit for a quick sale if you’d like, but it should be there. Not having it there (the living somewhere argument) seems to be the reverse of the “you don’t loose money until you sell” argument with stocks. Also nonsense.

    BTW, the reason you buy gold plated undies in the first place is that they don’t tarnish, and thus don’t need replacing, just a little polishing from time to time.

  15. Jason says

    Good article, makes me think. I the idea of of subtracting potential rent payments from net worth is interesting, though I can see why it’s not done.

    But, when we truly get down to brass tacks, this argument demonstrates why net worth is nearly useless as any sort of measurement.

    At best, it’s a ballpark number. At worst, it’s dangerous and can give a false sense of security. (Financial bubbles are all driven by speculations around net worth) We can’t even agree on how to calculate it!

    It’s much better to look at passive cash flow over time. It’s very concrete and takes into account nearly everything that you need. An increase in passive cash flow will indicate a growing net worth, anyway.

    Just my $0.02

    • says

      True. Net worth might be more an ego fulfilling calculation. Calculating viable income streams that can last a long time is what counts.

      At the same time, took my folks think a high income is a path to riches and forget to accumulate a nut. A high income can disappear in a nanosecond.

  16. Archaicx says

    The idea of “capitalizing the expense of rent” is a silly one. You wouldn’t “capitalize the expense of property tax” or “capitalize the expense of maintenance” for a homeowner.

    The beauty of renting is that I do not have any large, non-geographically diverse, housing assests to worry about. Renting minimizes risk in that regard. If the neighborhood / county / state / country goes to pot, I can either move or pay less for rent. I have options that a homeowner does not. We could argue as to the value of those options, but I wouldn’t ever consider putting them in a net worth calculation.

    A House is an Asset (although not my favorite kind of one), and a Mortgage is a Liability. Both should be included for Net Worth calculations. I think we can agree on that one. Whether or not home ownership is a worthwhile endeavor is another thing altogether.

    • says

      Which is why it’s silly to remove home equity from a net worth calculation.

      I definitely think you are right about renting. If North Korea successfully detonates a nuclear missile in your home down you have less risk.

      The question is, how is your net worth at your age and what is your net worth invested in if you are willing to pay someone else’s mortgage?

      • Archaicx says

        I’m worried less about North Korea, and more about the unfunded government pensions in Illinois.

        My net worth is inline with your recommendations (7 years of work and ~$300k). The vast majority of that is invested in S&P 500 index funds.

        I’m willing to rent because an equivalent property in the same neighborhood is currently a financially poor decision. What I mean by that is under any realistic appreciation over a 10 year timeframe, the net present value of owning a house in my neighborhood is negative. I’d put my monthly rent at 0.5% of the home value. I think my landlord values a good tenant and consistent cash flow over rate of return.

    • Mike says


      If we don’t count one’s primary residence as part of one’s net worth, then we also couldn’t justifiably count the value of a mortgage as a liability against one’s net worth. And that would be absurd, of course.

  17. hvgotcodes says

    Yeah I feel you have to include it. Money used to pay for a property is going to something you own, whereas with rent it doesn’t (it goes to allowing you to live somewhere for a month). If paying 2k in a mortgage increases your equity by 2k, you should count that. Not counting it would be like putting a mortgage payment into an index fund, but not counting those shares as part of your net-worth — why would you do that?

  18. David m says

    I have never heard of not including a house in a net worth calculation.

    I have seen discussions about what it should be valued at – but to exclude never.

    I have lived in my house for only 5 years but have paid off more than 50 percent of my original loan value – if I had a 30 year mortgage and paid at the regular amount I would have paid about 5 percent of the value – I’d I exclude the value of my house all the extra money a paid on my mortgage would be gone!

    We need to get people to pay down there mortgages – we need to let people include it in there net worth!

  19. says

    I used to include it when I was starting out. Everything changed when I saw so much equity in my home. It is one of the problems of living in California. Our home values are higher! I stopped because I felt it skewed my net worth. I wanted my net worth baseline to indicate my investing progress. I approach my investments conservatively and leave out my home equity, furniture and personal items. I even leave out collectibles and other valuables. I do not count my cars as assets nor include the loans as liabilities.

  20. Marcel says

    At the end of the day it’s just a spreadsheet calculation. You can run your portfolio with your real estate included and see what happens when you remove it. For me it shows that I’m too cash heavy and, being as conservative as I am, that suits me ok right now.

    With real estate included:

    42% real estate (SF condo 80%/Punta Cana condo 20%)
    42% cash
    8% total global stock fund
    8% total bond fund

    Without real estate:

    72% cash
    14% stocks
    14% bonds

      • Marcel says

        Hi Sam – The cash is in money markets. Three accounts which all started yielding 1% and are now around .85%. CIT Bank (.85%), Ally (.84%) and Barclays (.9%). What’s up with account yields going down while interest rates are supposedly rising?

        Not sure what to do with the cash. I’m thinking of buying another rental property although it seems I have enough real estate right now. Stocks seem over valued here. Looking for a way to invest in my X factor, tennis and music.

  21. Ashley says

    My home does not have a mortgage, so I always include a conservative estimate of what it would sell for. I “update” that figure twice a year by going to and looking at comparable properties for sale in my neighbourhood. My place is finished quite luxuriously, so I know I can get at least the average neighbourhood price should I need to sell it in a pinch as few other places are finished as nicely. I feel not including all the equity I have in my home would be silly, as it’s purely an asset without a mortgage. I do try to be conservative with my estimate of how much it is worth.

  22. says

    Uncanny, my most valuable asset is my pet bunny and I financed it via my secret lover’s credit card!

    So, I’ll bet our neighbors up north sure would argue FOR including a primary residence in net worth calculations. Otherwise, Canadian’s net worth might not be better than the net worth of us “poor” US citizens after all! Just thought I’d make the connection since you highlighted the high net worth of those silly Canucks in a recent post.

  23. says

    But on the bright side, they got to walk away given CA is a non recourse state and live it up with fancy cars and all yeah? Long live America. They were the ones who hurt the rest of us who kept on paying our mortgages and buying what we could afford.

  24. mary w says

    Well I would include my residence (along with wedding rings, furniture, cars, etc.) if I calculated my net worth. After all net worth, by definition, is assets minus liabilities. But for me that’s a meaningless number – I’m not going to sell by house or my jewelry.

    What I compute instead is what I call “investment worth.” It includes stocks, bonds, IRAs, rental houses (minus mortgage), vacation home, etc. For me that gives me a better view of the worth of things I would turn into cash and/or otherwise sell and buy different investment.

  25. says

    There is definitely financial advantages to owning a home and I agree that if you are doing net worth for comparison purposes it should be included, however for my own tracking I count the debt but not the asset of my home.

    To be honest, one of the major reasons I do this is that it results in a lower figure and prevents me becoming complacent. If I included my PPR I would have a positive net worth of around $90k, however by excluding it my net worth is $-340,000). Seeing a negative number keeps me hungry to make progress and reduce that figure.

    I’d probably add my home back in if I was trying to compare my net worth to someone else’s, but at the end of the day what does that achieve? For me Net Worth is a way to track my progress, not to see if I’m ‘beating’ someone else.

  26. says

    Most people overvalue their net worth. Just because you paid big bucks for a fur coat, car or pet bunny does not mean that you can sell them for that value. Something is only worth what you can get someone to pay for it.

    I do not include my house in my net worth because – I have to live somewhere
    – repairs eat up tonnes of money
    – it would cost me to sell and move
    – personal choice like you said

    Net worth of negative $5,000 but planning on seeing a positive number sometime in 2013.

  27. Awakeinwa says

    As alluded already, the question is premised quite heavily on economic geography. I live down the street from Microsoft. Despite a clubbed client business, it still has a healthy enterprise business for the foreseeable future. There is not a lot of available affordable rentals or housing nearby campus. Thus the free cash flow from renting my house is non-trivial.

    Arbitrage that by renting a similar size apartment a few miles away from Microsoft to arrive at 30-50% delta. I would continue to garner tax and home equity benefits while living a comfortable non-corporate lifestyle. Moving really is an opportunity to downsize throwing out crap your family doesn’t need. And frankly local moves are not too terrible.

    As for repairs, we will place suitable credit checks so as to secure a deposit for repairs 3-5 months of rent. As they start their Microsoft careers at whatever lifestage, one presumes they value their credit and would like to maintain a pristine report.

    Of course, your results may vary.

  28. says

    I tend to be conservative in my calculations or calc both ways and compare or split the middle. There are lots of businesses in SF that only accept cash. I wonder how many of them actually keep two sets of books or just use the “one”.

  29. Mike says

    Well, I suppose it all depends on why you’re calculating your net worth. If you’re simply trying to get an objective picture, then yes, count your residence, because objectively it is indeed worth something.

    If you don’t count it, then you end up with a very weird result. Consider this hypothetical:

    John and Steve both have exactly $100,000 in the bank, and exactly $0 debt; they both own no home but pay exactly the same $800 per month in rent. They have an identical net worth.

    Then, one fine Tuesday morning, John “sees a penny, picks it up, and all the day he has good luck.” And Steve’s uncle dies and leaves him a house valued at $300,000, which Steve immediately decides to move in to, thereby sparing him the necessity of renting; but he also considers that if he doesn’t enjoy the house he will sell it and join John in once again paying rent.

    If we don’t count one’s primary residence in net worth, then we have the bizarre situation in which we have to say that John has a greater net worth than Steve, because, after all, John found a whole penny and picked it up, whereas Steve merely owns a house. I.e., they used to have an identical net worth, but finding a penny adds to one’s net worth whereas getting a house doesn’t.

    Aside from that, let’s look, pragmatically, at what it means to own a property in which one lives: 1. You have home equity that you can tap, in many cases without actually vacating your house. 2. You have an asset that you can bequeath to heirs who can sell it. If you didn’t have that property, you wouldn’t. That’s pretty cut and dry. 3. You have an asset you can sell, which will put you in EXACTLY the situation of the renter in that now you have to pay rent, but with the key difference that you have a chunk of cash in your pocket from having sold that asset that for some reason we’re asking whether it’s actually “worth” anything. 4. You have a place to live that spares you from having to rent a place to live. The savings on rent is putative income. That income, of course, is reduced by expenses, e.g., maintenance and property taxes. But since that income is only PUTATIVE income it is NOT reduced by income taxes. So, e.g., a monthly dividend income of $2000 that is subject to 25% in income tax (and so is really worth only $1500) is no different than owning outright a house that would cost you $2000 to rent, thereby freeing you from spending $2000, but costing you $500 per month on average in maintenance and property taxes. And certainly we would all consider stock ownership that paid out $2000 per month in dividends (before taxes) as part of one’s net worth; so we should, likewise, regard a house that spares you $2000 per month in rent (but on which you have to pay expenses) as part of net worth.

    The most important caveat is that since we’re talking about NET worth, you actually have to deduct the value of any outstanding mortgage.

  30. mike says

    Of course you’re absolutely right, and for all the reasons you gave. The “you have to live somewhere” argument is particularly silly, because it also applies to renters; those who make this argument seem to forget this very crucial point. A homeowner has the option to sell– at a loss, at a gain, whatever the market is doing– and then pay rent. A renter has the option to rent. So they’re both renters or potential renters, but one of them also has a property. So it is only common sense to count the equity of the primary residence– positive OR negative equity, mind you (let’s not forget our underwater brethren)– in the calculation.

    I can illustrate this with my own situation. Personally, I own 3 properties, and have been living in one of them. But through a sudden bit of fortune, I have recently been given a part-time caretaker position that comes with free rent. This could last a year or it could, frankly, last 20 years. So suddenly I have been able to rent out my former primary residence. It would be absolutely absurd to pretend that my net worth has just increased from one day to the next by $500,000… but then if I lose or quit my caretaker position, and move back into one of my properties, that suddenly my net worth has fallen by the value of whichever property I move back into.

    A person who owns a house– let’s say it’s owned outright, only because this is simpler; in reality, you can adjust by any remaining liabilities e.g. mortgages– has the option to sell the house and become a renter. The amount that he would realize on the sale is absolutely part of net worth. FULL STOP.

    The person who owns the house also has the option to take a loan on the house. Let’s say that two people own outright houses worth $500,000; let’s say that tomorrow one of them takes out a $100,000 loan on his, and one of them takes out a $300,000 loan. It is absolutely indefensible to pretend that these actions are identical, but if you don’t count your primary residence as part of net worth, then there is no reasonable way to distinguish between the two of them– because if you aren’t counting the house, then it’s ridiculous to count the mortgage or HELOC.

    The person who owns the house, who is old enough, also has the option to do a reverse mortgage, and create an income stream that the renter cannot create from the house that he rents. When the reverse mortgage-taker does this, and he takes some of that money to the grocery store to buy a gallon of milk, if the cashier fails to say “Sorry, we can’t accept this money because the house you live in doesn’t count”, then the remaining equity absolutely has to count as part of net worth.

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