Calculating Your Net Worth According To Wealth Managers And Socialists

Calculating Your Net Worth According To Wealth Managers And Socialists

Your net worth can be calculated in many different ways. Let's explore how your net worth is calculated according to wealth managers and socialists. After all, with Joe Biden as President, there's more hyperbole talk about socialism coming back to America.

One of the common beliefs I'd like to overturn is the idea that one shouldn't count their primary residence as part of their net worth. This belief is propagated by some in the wealth management industry because wealth managers only earn fees based on your liquid net worth.

Ideally, some wealth managers would also like you to believe that your 401k, IRA, and any tax advantageous retirement account are not part of your net worth either. The reason why is because these retirement accounts cannot be managed by wealth managers so that hey can earn a fee.

Interestingly, the other group of people that believes a primary residence shouldn't be included in one's net worth is the socialist who looks to protect the feelings of renters who don't own any property.

Their logic is: if renters can't include their place as part of their net worth, neither should anyone who perhaps saved for years to come up with a down payment and took some risk to buy. In the socialist's mind, it's OK to discount completely a $200,000 down payment or a 100% increase in home equity.

Let's analyze a simple example to illustrate my contention that all savings and equity you've accumulated in your lifetime should count towards your net worth.

Your Primary Residence As Part Of Your Net Worth

Let's say you own three, paid off properties worth $200,000, $500,000, and $1,000,000. You also have $300,000 worth of stock.

You have no liabilities, no savings and no other assets to keep things simple. Your net worth is clearly $2,000,000. According to the wealth manager and the socialist, however, it is not.

Wealth Manager's Point Of View

If you live in the $1,000,000 property, the wealth manager will say your net worth is only $1,000,000 ($200,000 property + $500,000 property + $300,000 stocks). 

But practically speaking from the wealth manager's point of view, your net worth is really only $300,000 because that's the figure used to calculate fees. Even if you decide to rent out your $1,000,000 property and live humbly in your $200,000 property, the wealth manager's business eyes still only sees you as being worth $300,000.

From the wealth manager's perspective, one way to increase your net worth is to sell one of your properties and decide to keep the proceeds in cash or buy liquid investments such as publicly traded stocks or bonds.

Although I eliminated property taxes, insurance fees, maintenance fees, and freed up time by selling my rental house in mid-2017, I exposed myself to venture debt, real estate crowdfunding, and transaction fees through my reinvestments. Alas, there is no escaping investment fees. At least my reinvestments are 100% passive now.

Robo-advisors like Personal Capital have drastically lowered management fees from 1% – 2% to less than 0.9%. However, the problem with robo-advisors is that unless you tell them what percentage of your net worth they are managing, they will automatically assume they are managing your entire net worth. Therefore, it's up to you to make sure their asset allocation corresponds with your risk tolerance.

Socialist's Point Of View

If you decide to live in your $1,000,000 property, the socialist will also say that your net worth is only $1,000,000. But if instead you decide to move into your $200,000 property, it's unclear whether the socialist will agree that your net worth is now $1,800,000. After all, the wealthier you are, the more concerned the socialist is.

In the spirit of equality, if socialists assign no value to the equity in your primary residence, then they should also assign a negative value to your net worth for renting.

After all, the return on rent is always -100%. Therefore, the negative value assigned can simply equate to the cumulative cost of rent over time. The longer a person rents, the higher the negative value assigned to the renter's net worth e.g. -$240,000 value to net worth after 10 years of spending $2,000 a month on rent.

In other words, renting will always be a drag on your net worth if the socialist is fair, no matter how much you use your disposable income to invest in other risk assets like stocks. At some point, the cost of renting might even outstrip your investment returns as you reduce risk in retirement and receive lower returns.

Now That's Not Fair For Renters!

Renters and Homeownership rates over time

Since most of you are not wealth managers, most of you will agree how inaccurate the wealth manager's assessment of net worth is.

But given that roughly 37% of the US population rents, I can already hear a huge cacophony of complaints that it's wrong to assign a negative value to rent, but okay for the socialist to completely negate all the home equity built up in your primary residence. After all, it is human nature to be completely inconsistent in thought.

One of the common arguments socialists make is, “You've got to live somewhere!” True, but after living somewhere for 30 years, who has the ability to live rent free, earn rental income, sell their property tax free up to $250,000 / $500,000, or pass on their property to their children at market value to avoid paying any capital gains tax? Only the homeowner.

Another argument socialists make is, “The return on rent is not negative! I get a place to live!” So does the homeowner, but with the added optionality of making a potential profit in the future.

It's a tough pill to swallow that each rent check paid is never coming back, but acceptance is important for moving forward.

Let me be clear that I don’t believe renting is for losers. Renting is a fine choice for many people, especially people who are not yet sure of where they want to establish roots.

I just want to challenge the double standard where some people believe the equity value of a primary residence must be completely expunged from a net worth calculation whereas there is no negative value assigned to a renter’s net worth calculation. You can’t have without doing the other, unless you're delusional.

Think Clearly With Minimal Bias

In order to build wealth, you must be rational in your thinking. Liquidating your entire retirement portfolio because you find Donald Trump to be a vile man is not rational since he is pro-business.

Expecting to go straight to the corner office because you've been working a couple years is not rational since you have colleagues who've worked for decades and are still not there yet.

I know none of you are socialists reading Financial Samurai, so please don't think like one. It's understandable to be biased towards stocks and against homeownership as a renter.

The same goes for the 30% of homeowners in America who have no wealth besides their primary residence.

Just realize that in 30 years you will kick yourself for not owning a primary residence just like you will kick yourself in 30 years if you don't own stocks. Think about your children's point of view when it comes time for them to invest in order to recognize the power of inflation and compounded returns.

If you would like to include your primary residence as part of your net worth, feel free to do so. Being able to rent out my old home after buying a fixer upper in 2014 was a fantastic way of monetizing the value of my primary residence. So was selling.

If you don't want to include your primary residence as part of your net worth, that's fine as well. Conservatively valuing your net worth might lead to greater wealth as you spend more time hustling. Just know that when you die, the government will include your primary residence in their estate tax calculations.

Should your primary residence be included in your net worth?

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The Average Net Worth For The Above Average Person

Recommended Net Worth Allocation By Age Or Work Experience

Recommendation To Build Wealth

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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. Definitely run your numbers to see how you’re doing. 

I’ve been using Personal Capital since 2012 and have seen my net worth skyrocket during this time thanks to better money management.

Invest More In Real Estate

Now that we agree we can include the equity in our primary residence as part of our net worth, let's really invest in real estate. You're only really long real estate if you invest in real estate in addition to your primary residence.

My favorite way to invest in real estate with lower volatility, but also with a more surgical approach is through real estate crowdfunding. Given interest rates have come way down, the value of rental income has gone way up.

Take a look at my two favorite real estate crowdfunding platforms that are also free to sig up and explore:

Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing.

CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends.

I've personally invested $810,000 in real estate crowdfunding across 18 projects to take advantage of lower valuations in the heartland of America. My real estate investments account for roughly 50% of my current passive income of ~$300,000. 

115 thoughts on “Calculating Your Net Worth According To Wealth Managers And Socialists”

  1. A primary residence is clearly part of your net worth. Here’s our example. We bought a home in Southern California in 1994 and sold in 2004. The value of the home increased just over 300% over that 10 period (yay!). After selling, we moved to a lower cost state and bought a new home for less than half the cost. We invested the remaining proceeds into a start-up business, a rental home and stock market investments. Each of those new assets have grown over the past 13 years.

    The sale of the California home was simply a conversion/diversification of one asset class into a several others. How could that occur, if the original asset was not part of our net worth?

  2. Darius Ogloza

    The wealth management formula is essentially a scam pure and simple. Citizen A owns a home in SF worth $4M free and clear and has $500,000 in stocks. Citizen B rents and has $1,000,000 in stock. Who would you rather be? Seriously. According to that formula, Citizen B is a “millionaire” and A is not. Ridiculous.

    Also, the “renter versus homeowner who is better off” debate nearly always fails to account for the value of what I like to call the “landlord put.” In essence, the renter must bargain for a lease term and once outside of it could be compelled to leave the property regardless of how much hassle/inconvenience/cost may be entailed in a forcible move. The cost of that “put” needs to be included into the renter’s cost structure but never is. Rent control attempts to transfer the value of that put to the renter from the landlord – a “takings” in the classic sense but one that is never compensated under our laws regardless of how baldly unconstitutional these laws are.

    How do you value this put??

  3. Consider maybe liquidation value? It’s how I do it. I look at my liquidation value in a week to cash as my actual net worth. I would say a month is probably more fair. A week makes it either investment grade cost for your house or a very hot market, but is the actual value of your house if you needed the money. My current primary residence area has a very soft market with houses taking 8 months-1.5 years to sell on average, and often for well below list price. My county property tax estimates my house as almost 50% higher than I paid for it a year ago, because I paid short sale price and they seem to judge by market listings. The real problem with property in net worth is everyone OVERESTIMATES when calculating their home value and forget transaction costs. It’s why I use liquidation value, to include fees for my retirement accounts (not really in a position to use 72(t) yet).

    My real difficulty if I’m lucky is how I will count the *possible* double pension with healthcare for me and my husband in hopefully 15 years. The total net worth is always post tax (to include brokerage accounts) because that is really what I have to use if say, I needed to post bail for the unlikely scenario my husband is arrested for murder and there was no bail bondsman, favors I could call in, or access to credit. Some people like to calculate one way or another to feel better about themselves — but I think a low net worth motivates me more. Those in hot real estate markets love including their house, but rarely include the refinancing costs if they wanted to tap into their value (assuming they have at least 20% equity) or transaction costs in selling. I think liquidation is fair — a hot market will account for the ability to quickly sell and multiple bids, and a colder market will prevent those from over-valuing their house as it languishes.

  4. Socialism sucks

    Very true in your perspective. Unfortunately these socialists ideas are also spreading into the business world. I work for a quite large tech company and they are now implementing socialism in to our corporation thru our pay scales. As a 13 year employee I have been dedicated and hard working and have earned small incremental raises over the years. Now my company has a new policy where they are paying everyone the same regardless of work experience or tenure. What this means is if you happen to be a new employee you were given an instant 25% increase in your hourly rate regardless of knowledge or skills. If you are a very tenured employee you get 0-5%. A complete slap in the face for hard work and dedication.

    1. John H Lary

      Take you history of hard work and your hard-earned skills elsewhere, where they will be better appreciated.
      Buy one share of stock in your corporation, then go to the stockholders’ meeting and complain from the floor about current managements’ morale-sapping policies.
      Get together with similarly situated and discuss joint action of some kind, whether it be to form a united front in order to get a better deal from current management or be to leave your company en mass to form a competitor company.

  5. “Expecting to go straight to the corner office because you’ve been working a couple years is not rational since you have colleagues who’ve worked for decades and are still not there yet.” – Can’t agree more! I had a new hire ask for a promotion only six months into his job lol. Our rockstar associates (rare, and he wasn’t one) would get promoted in 1.5-2 years, with the average taking 3+. Clueless

  6. I purchased my primary residence during the absolute bottom of the last housing crisis as an investment because I understand my local market. I don’t plan on living there forever, and until the recent run up in the equity market it, the appreciation was way better…now only slightly better. Now if I had only levered up my purchase instead of paying cash for my house, wow that would have been a good one! LOL, actually there are zero regrets about having no debt. What I think is an important distinction though is that people should consider what the actual cash in hand number is net of fees and capital gains taxes…not just was Zillow says you could sell it for.

    Now if you are calculating you safe withdraw rate from your investments and plan on living in your current residence forever, of course you don’t include it.

  7. I believe the GAAP treatment on this would be yes include the property in net worth but value at the lower of cost or book value. So don’t inllude unrealized gains until the property is actually sold but do include expected selling costs to get a realistic value.

  8. Tuckerman Jones

    I factor in home equity as a component of net worth, but it is not the same quality as other net worth assets.

    First, the primary reason I own my home is a place to live. I am not in the business of speculating on the value of the asset at some hypothetical point when it is to be sold – notwithstanding that I did try to get a good deal when I bought. Second, it does not generate income like other investments (stocks (dividends), bonds, rental real estate, cash (interest)). Third, it is not liquid. Fourth, it is not a diversified investment. I view my home as a (nice) necessity that ties up money that could otherwise be more productively used (or at least more wisely risked). As a result, my home equity is a relatively small component of overall net worth and something I tend to exclude from investment decisions and analysis.

    My view on whether to own versus rent is to own (for the long term) because independently of its inferiority as an asset class, owning a residence with a mortgage requires forced equity savings and involves expenses (property taxes, maintenance, insurance and mortgage interest) that are cost competitive in my market as compared to rent of equivalent property. I suspect that this analysis would not work in all markets. And there is the intangible benefit of ownership that doesn’t have a number associated with it but does have value.

  9. Do you include a car as part of your net worth as many people do?

    I don’t include it as part of my calculations as my definition of an asset is something that appreciates in value over the long term or at least maintains it’s value with cash being the only exception.

  10. Ask the IRS whether your primary home is part of your net worth. From an estate tax perspective such as filing a form 706, I think the answer is clear that the home is in one’s net worth.

  11. I agree… What about 529 accounts? I’m annoyed that some savvy personal finance people exclude it from their net worth calculation when it’s clearly their property. Yes, it’s for the child’s tuition headed for college, but so is part of the money that they will spend on groceries.

  12. TheRunningMan

    The socialists can go to heck! Feelings…who gives a shoot about feelings? Of course net home value is included in net worth.

  13. I think you can include your home in your net worth if you plan to sell it one day and liquidate it as an investable asset and perhaps rent!

    I like to include the home in the net worth calculations but I know this is not the calculation I will use for retirement nest egg.

  14. BTW, I think that the main reason socialists -liberals do not readily include primary residence in net worth is that they’d also have to include their own homes in their own net worth. And since most socialists live along the hyperinflated housing coasts (it is their enviro-nimby lobbying that has restricted housing supply and driven home prices through the roof after all) including their home equity in their net worth would place them in the nation’s most top 5%, which would undermine their socialism as they compete virtue signaling with other leftists. Any chance they may put their money where their mouth is and voluntarily share some of that wealth? Perhaps since they have so much home equity they can spare some of their remaining liquid wealth? I’m not holding my breath…

  15. Ten Factorial Rocks

    I manage wealth for select few members of my family, on a no-fee basis, and I always include all assets including primary home in net worth. For home, I include only equity net of mortgage and subtract an estimated figure that covers transaction costs of sale and potential taxes under a separate line item called “selling costs”.

  16. I am a CPA and a wealth manager. I don’t care if people include there gold fish collection and put a super high value. Net worth means NOTHING.!!
    Cash flow and ROI is what you retire on.
    If I make 100k return a year on 1mm investable assets it’s 10%. Or
    100k on 2mm net worth because I include my paid off house. It’s 5%.
    All that matters is cash flow

  17. I’ll play.
    I’m a renter (aka sinner, as per this site, Sam pleasure spare us ‘the renters are not losers’ consolation, we know your strong bias!) who is 40 with kids and never owned a home. I have nothing against real estate as an asset class. I have nothing against any asset class for that matter. I believe in appropriate asset allocation that is continually monitored and rebalanced based on risk tolerance and market dynamics. I can confidently say that my mix of public equities, reits, commodities, currencies, credit, bonds, cash, hedge funds has far outperformed putting any money put into a primary home in my market (Manhattan) when you consider liquidity, co-ops, maintenance, etc. Not to mention the headache of owning and being locked down, at any give time you may be living in a home too large or too small. Meanwhile I was able to rent exactly what I want (no compromise on space, commute, amenities, views) at least 20% under the market (no special deals or help from anyone, just prudent searching and negotiating with landlord) the whole time, and was able to move apartments as my needs and tastes changed and my family grew (didn’t move many times). Now of course if I had bought a place in an outer borough (long crappy sweaty commute and lower quality of life for my family) at the right time with a lot of leverage, I could have made a lot of my money, but still lower than my levered investments (hedge funds). I could have also super leveraged my assets and bought investment property in the right place at the right time (just like you Sam! But alas we are not all property shark geniuses) but it as outside of my risk tolerance (when you’ve almost won the game, it’s better to play it safer IMO). Overall, I’ve been financially better off not owning, and I now have liquidity to walk into a house and buy whatever I want in cash. This doesn’t mean I don’t mean to buy anything in the future or include physical real estate in my asset allocation, like I said I have no bias toward any asset class. Every asset class should be looked at in terms of the entire portfolio without regard to emotion. Thank you for reading!
    And yes, of course your home should be included in your net worth!! Net worth is a simple calculation, net worth = total assets minus liabilities minus estimated costs of liquidation.

    1. I own my home, but I do not think that renting is for losers.

      In addition to the mobility and flexibility advantages you mentioned, purely from a financial standpoint, owning is not a clear winner over renting, especially in speculative markets (i.e. the hyperinflated coasts).

      More specifically, ROE (return on equity) in places like San Francisco is dismal. Capitalization ratios for owners are around 40! So what’s happening? Are all home buyers delusional?

      No. The only reason these capitalization ratios are sustainable is if there is a lot of home value appreciation expectation, appreciation above and beyond inflation that is. Even people who do not fully rationalize it are basing their home purchase decisions in these expensive areas on the expectation of great home price appreciation. Otherwise they would rent instead of buying, or other more financially savvy people would tell them to.

      If you buy a house in San Francisco to rent it out, even if you put 30% down, your cash flow will be negative because the cap ratio is so low, and the little your mortgage payment contributes towards principal no way makes up for it. So it all hinges on significant home value appreciation above and beyond inflation (inflation only appreciation is no appreciation, that is for losers).

      So far home appreciation in San Francisco and other expensive west coast areas has indeed far outpaced inflation, and kept up with speculative expectations, primarily due to an enviro-nimby coalition that chokes off new housing supply (an environmentalist renter, now that is a financial shoot-yourself-in-the-foot looser in my financial book). But the moment this strong appreciation expectation fades away, these markets will collapse, since it makes no sense whatsoever to buy at these cap ratios if there’s no appreciation. People will stop buying and a vicious cycle of price declines will bring prices back to earth.

      It has not happened yet, of course. But can prices (and wages) keep exponentially diverging between the coasts and the rest of the country? It’s very hard to answer a perpetual “yes”.

      Remember, there are short term bubbles that burst (two to five years) and then heal, but there are bubbles that burst and never recover. After all, in the fifties and sixties Detroit was the dynamic industrial activity center everyone wanted to be in. Today?

      Will high tax enviro-nimby California always be able to extract ever larger sums for housing just because it’s the electronics capital? In perpetuity? Without any other area worldwide been able to break the inefficient high tax nimby cartel and undercut California productivity, wages, and home prices? In perpetuity with ever higher capitalization ratios diverging into infinity?

      As the pace of everything human keeps irreversibly accelerating many things that we never thought possible will happen. Which ones, remains to be seen. The investor who has even slightly better intuition than random will come out ahead.

  18. I’ve worked for several wealth management firms and private banks, and I’ve never heard of a wealth manager not taking a home into account on a net worth statement. Our financial statements always include line items for real estate as well as automobiles and even jewelry, art and furniture. Those are certainly part of net worth and are important to understand in order to advise properly, especially with regard to cash flow needs, insurance and estate planning.

    But they are USE assets, not INVESTIBLE assets. They can’t be rebalanced, nor to they provide income. Many fail to appreciate over time as well and may even be impossible to sell in any reasonable length of time (even real estate, especially when you get into super high end homes). So naturally investment managers ignore them for purposes of portfolio management and asset allocation/rebalancing. They are not considered “assets under management” for fee purposes either, as you note (at least in most cases – when trusts are involved that can change).

    The vast majority of all clients with enough money to have a wealth manager have a small portion of their assets under management, for the record. We do not ignore those assets obstinately because we can’t charge fees on them, as you suggest. There are often huge business or real estate interests, stock options or RSUs, private equity holdings, personal loans and even sometimes large 401k assets that cannot or will not be directly managed by a wealth advisor.

  19. Kate Overseas

    I own two homes and I don’t live in either of them. I rent a two-bed in a metropolitan city. One of my homes is already paid off whereas the other is carrying a mortgage but only has a few years to run. Of course they are part of my total wealth as well as net-wealth. They are not providing extra cash to me at the moment which is fine because I want to motivate myself to earn more cash through work and business. I know it’s nice to generate enough passive incomes but it is certainly not fun to leave a workplace and stopped interacting with the world on a face-to-face basis when you are still young. Working is learning and growing. Wealth advisors from a wealth management company always carry an agenda. They advise you but really serve their employers. If I had sold my US property and bought stocks perhaps I have doubled my wealth today. But I don’t regret as my home has emotional value to me. I wish I had bought my third property in the city where I live as real estate prices had quadrupled in the last ten years. Being a home owner also gives you a sense of pride where renters are hard to feel.

    Enjoy reading your posts Sam.

  20. Since this is a financial website.

    The socialist may regard affordable renting or government housing as a form of subsidy as it clearly has value.

    The future value of those cash flows could be discounted into a NPV and subtracted from the net worth of the individual who has a house.

    It get more complex from here as your article pertains to rentals which are fixed assets and depreciate over time.

    Liquid assets are easily valued where illiquid ones less so. That’s probably another reason why wealth mangers struggle with the net worth calculation. Ever asked a RE agent about stocks?

  21. Agreed, the value of the different properties including the main one should be part of the total wealth. Specially as you can rent a part of your main home and also as you can sell it.

  22. I can sell my $750k Home and rent for 20 years at $3k/mo, so yes, it’s part of my Networth.

  23. I only consider home equity as part of my net worth in so much as it saves me $3000 per month in rent since it is paid off; just like any other asset providing 6% cash-on-cash return with a potential equity upside.

    Stay focused on building a solid passive cashflow, and just factor your house into the calculation.

  24. Of course it is part of your net worth, it is just generally speaking a pretty lousy investment and more illiquid than most anything else you have. To me it is like your cars or your toys or any other possession except it is slightly better than a depreciating asset. It is worth what you can sell it for but except for some freak time periods it will barely keep pace with inflation.

  25. The net worth angle seems like a bit of a strawman. The more contentious debate is about whether to treat your primary residence as an investment. I do like the idea of assigning the a negative value to renting; you could easily calculate an NPV for a rental house.

  26. I have worked in wealth management for a decade and have never heard of excluding ones primary residence from their total NW. I presume the only reason you would do this from a retirement planning standpoint is if the individual never wanted to sell/rent the home out in perpetuity under any circumstance.

    1. Ditto. Detailed net worth statements always include real estate, business interests, stock options or RSUs, automobiles, even art and jewelry and other collectibles. Most wealthy people have lots of assets that will never be under management of an investment advisor (until/unless liquidated), but which still require understanding by the advisor in order to give adequate advice (especially around insurance and estate planning).

      But personal real estate (not investment property) is generally an EXPENSE, along with other expensive consumer assets like jewelry and cars. Sure, you COULD sell them in a pinch, but most people don’t plan to (unless they are trading to another equally or more expensive item/property), so they aren’t part of your investment portfolio in any real sense.

  27. “Socialism is a great system, until you run out of the other person’s money.”
    -Margaret Thatcher

    1. Socialism is a great system if you assume that a large enough percentage of the population will work hard at necessary job that aren’t that much fun, for absolutely no reward.

      1. People love to make fun of big bad Socialism, until you threaten to take away their Social Security checks!

        Then, suddenly, people realize that Socialism isn’t 100% as awful as described.

        Don’t even pretend to take away their insurance, fire department, or public schools and roads!

        And, hello from Sweden!

  28. Financial Orchid

    I have 2 nums. With primary dwelling and without. Without when thinking how I want to retire in Cali for half the year then have a place to go back to during the summers without putting furniture in storage and another number to include primary dwelling for net worth calculation if I were to rent the place out the whole year and travel extensively thru out the year but then I’d have to factor hotel costs when back at home base and it’s just easier to leave everything in place in the primary dwelling instead of renting it out. I think of it more like my base camp

  29. I am currently a renter (in between homes i suppose), but not as uncofortable with being a renter as i may have been in the past. What gets sometimes lost potentially is that when you’re renting you tend to opt for less is more because it is true – you will never see the rent money again. But when i buy i know i will be buying a bigger place than i rent. With that also come more expenses. To make this apples to apples you have to compare expenses vs expenses, and gain on equity side by side. Because i am renting currently my expenses are what they are and any excess is going into my investment portfolio with expectation of return. Had i bought into the house i am locked into an illiquid asset which may or may not leturn at a lesser rate than my investment portfolio.

    I am fundamentally in the camp i want to own and dont have a problem with homeownership. But folks tend to buy too much, which slows down or eliminates their ability to also grow net worth via non real estate equity returns. Thoughts?


    Ps. First post. Love the blog.

  30. Our primary residence is by far the largest asset we own – which is why I don’t include it when thinking about net worth. It keeps me sharp and focused on growing the relatively smaller stock portfolio! I fear I’d become lax if I saw a significantly larger net worth figure in my financials each month…

    However, when I think longer-term about my family and the assets that will be available for them, the primary residence is certainly one of them!

  31. Hi Sam,

    I am 28 and bought my house in 2015. I am up almost $200k in equity. Since almost all people my age can’t even afford a house they delude themselves by saying they don’t want to even own a house because it is more expensive than renting, i have stuck in one spot forever, and I like living in the city.

    Its just all delusion to make themselves feel better on the fact that they can’t or won’t make sacrifices to own a home at a young age.

    Its funny because I will address all their points on not wanting to own a home and they look in their eyes is fear when they realize I am right.
    1. It is not more expensive to own than to rent, not in the Greater Seattle Area.
    2. I can easily hire a property manager, and become cash flow positive with renters.
    3. While some may enjoy living in a 400sqft apartment or live with 5 roommates… I enjoy my home gym in my garage, my deck, my yard, my 2 other bedrooms I can rent out if I ever wanted to.

    My generation is just full of cope. The funny thing is that I guarantee once we start getting into our 30’s and 40’s they will be wanting a home of their own. Which is great because they can rent from me.


  32. The rub on whether or not to include your home in your net worth depends on what you plan to do with that information. In regards to retirement, unless you plan to sell\downsize, money in your home will not provide you a return. And you cannot, *should not*, include it in your safe withdrawal rate calculation.

    If you really just want a net worth calculation just to know your number, why not include your car or any other sell-able asset? Does it really matter if the return on these things is negative? But if you are not planning to actually sell these things then it is not really helpful in any calculation anyway.

    1. Good points. I was speaking to a Airbnb employee who said their missing is to unlock value out of every primary residence by having people rent out rooms in their home for cash flow. It’s been happening for a while now, and will continue to happen in the future as Airbnb becomes one of the greatest startup success stories.

      Times have changed folks.You can monetize your primary residence much easier today than ever before. But, I guess it takes time for perceptions to change.

      1. Interesting, I did not consider that. In the case of AirBnB, I feel it would be better to split out the portion that is the rental and try to separate the two. But I’ll admit that this might be difficult to do.

  33. Our primary residence is by far the largest asset we own – which is why I don’t include it when thinking about net worth. It keeps me sharp and focused on growing the relatively smaller stock portfolio! I fear I’d become lax if I saw a significantly larger net worth figure in my financials each month…

    However, when I think longer-term about my family and the assets that will be available for them, the primary residence is certainly one of them!

  34. I include my home equity in my net worth because it is an asset just like any other. Interesting that some feel it nor retirement accounts should be counted. I would also include annuities in my net worth although I haven’t given thought as to how I would, purchase price or income over X years.

    1. I’d recommend a calculating the present value of the revenue stream. There are assumptions involved such as inflation and lifespan but it would provide a rough value.

  35. I agree that NRV on your home is part of net worth. However, I strongly disagree with the belief that renting is for losers. We are currently selling our home and intend to rent an apartment–perhaps forever or until the next crash in the housing market.

    A house is a highly leveraged, illiquid investment that has enormously high carrying costs. Of my $2700 monthly housing costs (mortgage, insur, interest, utilities, maintenance), less than $500 relates to principal payments. This is a modest house where we put more than 20% down. When the mortgage is paid off, we will still have monthly costs of $1500 per month, which will no doubt rise with inflation.

    My rental budget was calculated by subtracting the principal payment from the total of all housing costs, even hidden ones like painting, plumbers and new roofs. The NRV from selling my home will go into a REIT or a bond fund along with a monthly payment equivalent to the principal payment made currently. If the market goes down (and it is enormously high in Boston) we will use those funds to buy an apartment. If we rent forever, we will have the interest on this fund to subsidize our rent in retirement.

    I bought my first house for $155K and fully intended to stay there the rest of my life. Little did I know that life happens and sometimes you have to move (jobs) or choose to move (schools). With each move, came significant costs. My husband’s health is uncertain–if we need to pare down our budget, we can easily do it as renters. Homeowners look at what they paid and what it’s currently worth and pat themselves on the back. That is a very simplistic, incomplete way of calculating whether a home is a good investment. We owned homes while raising children for stability and access to good schools. It was not a financial investment.

    1. Let me be clear that I don’t believe renting is for losers.

      I just want to challenge the double standard where some people believe a primary residence must be completely expunged from a net worth calculation whereas there is no negative value assigned to a renter’s net worth calculation. You can’t have without doing the other, unless the person is delusional.

      1. Why would you assign a negative value equal to the cumulative cost of rent over time? Rent covers property taxes, maintenance and repairs, insurance, utilities, etc. By that logic, shouldn’t there be a negative value incorporated into a home’s calculation of NRV?

        On another topic, I have spent a lot of time thinking through the rent vs. buy decision, specifically regarding how it will impact retirement. I’d be interested to hear your viewpoint of when/how it makes sense to rent. My rent costs will be 20% of my base salary which is the only one we can count on long term. We will still make monthly “principal” payments to a conservative investment.

  36. As someone who lives in the sf bay area, I strongly agree with this. However, the fear of this area losing value in an earthquake or fire always looms.

  37. I don’t include my home in my net worth for a few reasons: 1. It’s more motivating to have a smaller net worth, 2. it’s harder to assign a value to property than it is to other things such as stocks and debt, and 3. net worth is not a contest, I’m not trying to beat anyone else’s net worth.

    That, and I’m more concerned with my change in net worth, so if I assume the house doesn’t change value, then assuming the house is worth $0 is safe for determining change period-to-period.

    If I had investment properties outside my home, I’d probably include those in my net worth, though.

    1. Those are good reasons, although it’s pretty easy to estimate the value of your property nowadays.

      Your net worth might be a contest with your own goals though, because the sooner you can reach a certain net worth you deem is enough to retire on, you can finally do whatever you want if you aren’t already.

  38. A person’s primary residence of course counts as part of their net worth. What is more questionable is if it counts as part of their financial independence. The latter is often not the case, especially for some people who live in the hyperinflated real estate markets of the coasts.

    In these hyperinflated markets most citizens participate in some sort of enviro-nimby coalition that chokes off housing supply and causes housing price superinflatation. Typically owners hold the nimby side of the coalition, and naive renters shoot themselves in the foot by holding the environmental side of the coalition.

    In these environments people become trapped in their home equities and often the taxes they precipitate. For example, buying the typical two million dollar home in the San Francisco area precipitates an over $2000 MONTHLY tax bill alone. This is totally lost money, un-investable, money. This is more than you could possibly put in a 401k and that’s an account you one day rely to retire on. You can rent an entire house for that amount in most of the rest of the country.

    Yet the enviro-nimby coalition feeds upon itself since it relies on a model of continually self perpetuating restrictions and housing price inflation.

    Save us investors who beautifully exploit this pyramid scheme, most residents lose out big. The only ones who gain are those who have no kids and who one day plan to move out of the area. Renters are, of course, losers. Homeowners who stay put are also losers because the building restriction policies they support are inflating their future houses (the houses they one day dream of upgrading to) even faster than their current residences. If they have kids, even worse, they are essentially pricing their offsprings out of the area, for the essentially worthless satisfaction of seeing their house paper value increase. As I said, the only ones who benefit handsomely are us investors.

    I have one simple way for inverstors to calculate how much money living in their primary residence burns. It is essentially:

    (House price) x (yield in safe passive investment)

    It’s essentially the opportunity cost of having your home’s value trapped under your feet. The formula works whether you own the home outright or have a mortgage. You are either paying the mortgage, or trap the equity, or a combination thereof.
    For yield in safe passive investment I use a 4% return net of inflation, since it is rather easy to find a safe mostly passive investment with that yield. I’d be interested to hear what figure other people use.

    So if you live in a 2M house in San Francisco you are burning about $80k per year. Any appreciation you only cash in if you move out of it, and buy a cheaper home to live in, in which case you are most likely moving out of the area.

    So keep up the good work. And make sure that next time there’s a city hall hearing on some new construction, make sure, you grab your pitchfork and green flag and go out and protest — be heard! shoot it down! Save your capital returns!

  39. Do people not include retirement savings as their net worth? Because that’s absolutely dumb. It would be penalized but that’s still locked into your accounts. It’s still a number that you own. If they’ll go as far as not including retirement then what’s to say anything counts. Sit in all cash and hide the cash in a bunker with you then, you won’t even need to worry about a house or property taxes

  40. Damn Millennial

    If I can sell an asset or use it to generate income I will include it in my net worth.

  41. Recovering Engineer

    Yes the value of your home should be in your net worth calculation. However there is one time where I think it is appropriate to exclude it. When you are looking at retirement and trying to determine retirement savings needed or how much you can afford to spend then you exclude your home. All of the math and studies done that generated the 4% Safe Withdrawal Rate is based on your liquid assets invested in stocks and bonds. So if you have a $2M net worth but $1M is in your house and $1M in stocks/bonds and you start living on $80k/year in retirement you will run out of money unless you sell the house. The offset to this is the fact that with a paid off house your annual expenses are lower than a renter so the necessary portfolio balance is smaller. But again, that isn’t a calculation of net worth that is a calculation of retirement spending. People just seem to conflate the two in personal finance circles.

    1. Agreed. The value of your home is part of your net worth, but it is not part of your liquid assets for determining withdrawal rates and cash flow. You can’t sell 4% of your house every year to pay the bills.

      This brings up a related question: Is it possible to purchase a home such that the reduced annual expenses make up for the reduction in liquid assets? In other words, would there be a case where your withdrawal rate would go down (you are spending less of your liquid portfolio each year as a percentage of the total) with owning vs. renting? This assumes that you are already FI and are living off of your portfolio.

      My feeling is that probably the only place where this would be possible, if at all, would be in a town with cheap houses and expensive rents. What do you think?

      1. Put another way, is it possible to buy a house such that every $100,000 of the purchase price saves you more than $4,000 per year in total housing costs?

  42. I include the equity of my home in my net worth but I remove it when I calculate how much I need for retirement because it’s not generating income. (but my estimated expenses are lower because I own my home).
    I noticed some people include cars, maybe it’s because I have a cheap used one, but I don’t.
    At the end of the day, you should include whatever you feel comfortable with, you are the one working with your numbers for planning

  43. I voted yes, because OF COURSE your primary residence should be considered in your net worth.

    However, I would caution to value that residence very, VERY conservatively, to reflect the uncertainty of the housing market and cost of transaction fees associated with selling a home.

    For instance, I value my primary residence at the price I paid in 2015 for it. There has been CONSIDERABLE appreciation in my area (the condo directly above ours sold for nearly 10% more than ours just 9-10 months after we bought, and prices continue to rise)…..but I don’t look at it. I keep the value at the exact price I paid for it in 2015. Every time I make a mortgage payment, the principal part of the payment helps “increase” my net worth (by virtue of reducing my mortgage principal debt), but appreciation is NEVER factored into my net worth. When we sell (probably in 2-3 years when we need/want to move so our kids can start public school), anything we get above our initial purchase price will just be a pleasant surprise/bonus.

    1. Agree with your initial calculation. I keep in mind that I’ll pay down ~$15k of my principal this year, thus adding that amount to my net worth. I refied into a 15 year fixed just before the election, so I’m accelerating capturing equity.

      I get the mentality of being conservative with your residence value, but is there a point at which you might count this? What if your condo value appreciates 50% more than your initial purchase price? Is there a LTV ratio at which you would count this?

  44. As long as you plan to live in a house, the value of your house is irrelevant. Include or don’t include it in your net worth – it doesn’t matter. Net worth in itself doesn’t matter. Return on capital and cash flow is all that matters.

    A house is an “investment” insofar as the money it saves you vs. renting (saving is the same as making, no?). It won’t always save, so you need to run the #s. Renting is not always “throwing money away”. Paid off houses aren’t free – add opportunity cost/taxes/maintenance/insurance.

  45. It is amazing how mischievous and controversial your writing sometimes tries to be (and keeps it fun to read, I mean, socialists?)… and yet listening to your last audio version, your voice is so silky and reassuring! Next time there is blood in the streets, I just want to listen to you smoothly tell us to take the long view and come out ahead in the end.

  46. Seems if you are comfortable selling your residence or moving to another size/shape of shelter then, by all means count it. If, however, you aren’t willing to move under most circumstances then it is better ignored. When I started out and I had very little and my home was bare bones / small I didn’t count it because I couldn’t get much cheaper ($5000 single wide mobile home). Now I count it, big, worth more and kids are moving out. Definitely an asset that is in play going forward.

  47. I include the equity part of the home in net worth. If you liquidate it becomes cash – less fees and such. You’re working to pay for it, so slowly it counts.

  48. I do it both ways. The thing about a house is that it cannot be converted into liquidity as easily as other investments, even other real estate investments. I have owned a home for 23 years now. I have received the benefits. The home I have been in for 13 years has now started to rapidly appreciate. I do think it is OK to list that as a net worth item but know that it is probably the least liquid (or close to anyway) in your portfolio.

    In 5 or 6 years, we are planning to move south. At that point, I don’t know that I will want to own. There is a downside as well to be a home owner with maintenance, taxes and so forth plus the lack of flexibility. Not sure what we will do yet.

  49. This article really misses the mark. Wealth managers should know their clients overall net worth, including equity in their home, as well as LIQUID net worth. The liquid net worth (which would include 401k’s, IRA’s, checking, savings, cash, investment accts, etc) is required for a wealth manager to know by regulations. It has zero to do with fee’s charged. Most wealth managers are only compensated on assets they are directly managing, not someone’s liquid net worth. I agree its important for a wealth manager to account for equity in your home as part of your net worth and a good wealth manager WILL account for that in your Net Worth/Cash Flow statement.

    1. When I talk to a “wealth manager” they usually don’t want to talk to me after the initial discussion. I’ll be open with them. When they hear that 18% is in property values, 55% in real estate notes, 10% in savings bonds, and other products purchased when I was stoopid. They can manage the remaining 20 ish percent… They don’t like me.

      Some of the more “crafty” ones will recommend a second or HELOC on the properties to put into a “structured insurance product”.

      It’s always a fun conversation…

  50. By the way, Sam, I’m not sure how laws work in every State, but in Florida it can be very advantageous to keep your funds in your primary residence. Notably due to the homestead laws. Take a doctor being sued for malpractice, can’t touch his homestead. So a doctor having a paid off $2M house has $2M of his net worth protected. It’s why it’s not necessarily a bad idea for a high earner to buy a very expensive home and put a ton of money into it to protect it from any potential lawsuit. The primary residence can be a great way to store and protect your net worth!

  51. I agree. Of course your primary residence should count towards net worth. The argument used that you always have to pay for a place doesn’t hold water, because it’s simply not true. Maybe you moved in with your parents? Maybe you decided to live in your RV in free parks. A tent… or downsized and kept a large portion of the funds to reinvest or live off. I like that Personal Capital has an option to add your residence :)

  52. Great debate for sure.

    Personally I have not included my home (which is fully paid off) when I fill in my spreadsheets to calculate my net worth/asset allocation.

    In the back of my mind whatever figure I get I know that I can add more money to it based on home value but I choose not too because I like concrete numbers and I will never truly know what my property is worth until I sell it.

    So basically I get a hard concrete number from all my other assets combined and in my head I sometimes add a fudge factor bonus of what I think my property may bring (in the end it is all moot because I really don’t plan on selling this property and hope to pass it to my daughter).

  53. Not-quite-a-socialist checking in: housing is definitely part of your net wealth.

    It *shouldn’t* be, though, because housing should be a right rather than an asset class.

    But in the meantime, it very much is. Example: if we exclude the value of the family home (or “principal place of residence”) from things that are means-tested, that’s a massive discrimination against renters.

    1. Would you prefer everyone to live in a Soviet blockhouse? Click on the link, that’s what housing looks like as a “right”. America has some problems, but travel to some developed countries abroad and you’ll see how great our actual living spaces and accommodations are as a whole.

      1. Keep in mind, when you criticise those buildings, that Russian industrialisation & urbanisation (and literacy!) happened almost entirely in the Soviet era and that they had a post-WW2 baby boom too. By 1960 the Soviets were undergoing an intense housing shortage and the Krushchyovka is what made sense to them at the time. For the people who first lived in them it was a massive step up.

        Here in the settler West we built our suburbs, and funnily enough lots of them ended up with big maintenance deficits as well.

        Now, as we know, central planning on a nationwide scale isn’t necessarily economically efficient, especially when you’re trying to maintain an empire of sorts and keep up with the US (who has 50% more people than you, didn’t have to rebuild after being invaded by the Nazis, etc). And the USSR missed the boat on computerisation. But they were extremely effective at developing their country from mostly subsistence agriculture without significant foreign investment. Like anything else, you have to judge them by the standards of their circumstance.

        BTW, just for the sake of targeting any future comments along the lines of “go travel somewhere outside America”, I’m Australian.

        1. Nice to see an Aussie on here who articales a mixed economy well.

          I do agree that basic shelter is a *human right* but that does not extend into McMansions in the suburbs, flash inner city apartments, trendy units or homes on a quarter acre lot.

          There is a mismatch particularly in the younger generation who may have economic wants far beyond basic needs and have raised there own expectation of what a need is.

          Soviet style housing was pretty good for the time and in the circumstances, 21st century western living can do far better for a larger pool of people.

  54. My compromise is that I value my home at 92% of its market value to account for selling fees, staging costs, moving fees, origination fees of a new loan if I were to move, and slight renovation costs of a new home (painting, carpet, etc). Basically, liquidation value.

  55. I have always done it as assets – liabilities = net worth. You always count the equity in a home (or any asset; Cars if you are not leasing, Insurance, stuff in your home, etc.). You also count any liabilities you must pay back (Car Payment, Credit Cards, Mortgage including interest, student loans, any rent you have signed a lease for, etc.) This is just basic math.

  56. Non-socialist here! You are of course correct. I cannot understand how people rationally argue otherwise, except from their position of bias or confirmation. These head games are deadly when it comes to making decisions as you rightly point out.

    I fail to see how people cannot understand that being able to relatively quickly and relatively monetize a housing asset (certainly no more difficult than selling a private business stake for example, and no one would argue that a private business stake is a contributor to net worth) qualifies it too as an asset. It seems completely obvious.

    Now is it a “good asset”? That is a completely different question to ask and answer.

  57. Yeah I see no reason why a Home or Home equity shouldn’t be part of net worth calculation… as long as it isn’t being factored into a safe withdrawal rate!

  58. I include my residence in my net worth calculations however I also maintain and pay more attention to “Investments and Liquid Assets”, a subset of our total net worth. That is the number that I hope will grow over time at a rate that will at a minimum offset inflation and more importantly generate sufficient dividends and interest and capital appreciation to supplement our retirement income, including SS, Pensions and any other revenue generating passive vehicles. To the extent that we downsize to a residence that frees up any of that Real Estate value, then those additional funds might some day be important to supporting me.

  59. Sorry Sam but I don’t understand your discussion and arguments for a socialists view on the role home equity plays in net worth calculations. The overriding tenet of socialism is the collective ownership of the means of production, capital etc. by society. Thus a socialist would argue that housing is collectively owned by society and therefore the question “should you count your primary residence as part of your net worth” isn’t even a valid question. Socialism is a rejection of individual ownership.

  60. My number one reason to discount at least one property from my net worth is the simple fact that you have to live somewhere. An argument can be made to take the median home value of the town/city you live in out of your net worth rather than your true home value but it comes down to what you want to do or justify with your calculation.

  61. I work in well management and have never heard of not including real estate in someone’s net worth. This is news to me. It’s certainly not included in AUM which is used for calculating advisor fees. Often home equity gets trapped – but it’s still part of net worth. Net worth equals total assets minus total liabilities.

    1. I agree. And I also work in wealth management.

      Obviously wealth managers only get paid on the accounts they manage, but that doesn’t mean they exclude other things like tax-advantaged accounts and real estate from net worth.

      (If you have a wealth manager who is this stupid, please do yourself a favor and get a new one.)

      1. Good advice!

        Glad you guys aren’t one of those wealth managers who excludes everything but the liquid portion of one’s net worth.

        I hope my example demonstrates one viewpoint and how it’s important for folks who do hire a wealth manager to go through their entire net worth composition to come up with a financial strategy.

  62. Sam, I went with Other in the poll and was surprised I was in the minority at only 4%. I think you should only count your downpayment, paid off portion of mortgage, and estimated increased value of your house from when you purchased it.

    This seems fair because you are not counting the unpaid portion of mortgage (liability). The model is a simplification however since it does not factor in property taxes or future selling fees. You wouldn’t count any other debt towards net worth, so you should not count your unpaid mortgage either.

    1. If you use Personal Capital, you would put in your entire home value. The mortgage is a separate item under liabilities. I don’t think anyone counts unpaid mortgage towards net worth.

      1. I am also a Personal Capital user and find the way they value a property with Zillow that often changes daily a bit of a pain in the total net worth calc. Valuing your primary residence or investment properties day to day does not make sense. Also as mentioned a number of times above Real Estate often carries debt and has a number of fees/costs when converting these assets to cash or other securities. Therefore I think the “Other” option above is the correct answer as the value of any property is an estimate and therefore should only be considered part of net worth at some level less than 100% of value less debt and transaction expenses. This formula would vary by Primary Residence, Vacation Home or Investment Property (commercial or residential). Just my two cents.

        1. You aren’t required to use the Zillow estimate. You can just add your own number based on your calculations. If the real estate carries debt, this should show up under your liabilities/debt under Personal Capital providing you entered the credentials accordingly.

          I don’t personally get caught up trying to calculate transaction expenses, etc. It’s just not that important. I put an estimated value for my properties that is on the conservative side and that’s fine with me.

          We are saying essentially the same thing though. House is an asset minus liabilities. Personal Capital just separates these out, which I like.

  63. I include my home equity in my net worth. I see the argument on the other side that if you are valuing things you would reasonably sell, you should only count things that you would use to fund your spending in retirement. If you have no plans to sell your house to use the money to spend, then that money should not factor in to a retirement calculation.

    I’m glad you mentioned Wealthfront. I signed up with them in mid-2016. They let me link all my accounts, including my mortgage and home value, for them to manage it all. They also allow me to specify whether I expect to stay on my home during retirement, downsize, or sell it and rent somewhere.

    So they can say, we’ll its worth $200,000, and I expect to sell it and buy somewhere for $100,000, so only $100,000 of my home equity is available to spend in retirement.

    That’s a pretty smart way of doing it.

  64. Wow, I did not know people didn’t include fundamental things like property and tax-advantaged accounts… That is just mind-boggling to me. For a while, I was excluding HSA and emergency funds from my net worth because I felt if they were out of sight/ out of mind I would be less inclined to use them. I went back and added them all in so I can’t have a full view of our standing.

    I guess I see property as too big of a line item to ignore. Plus what about the loan? Should I have a negative net worth because of a loan liability listed in my net worth without the asset that holds its value represented?

  65. I don’t consider my primary home in net worth as I would just spend the money to buy another home or accrue the same liability in the form of a reverse annuity as a renter. Expense are accounted for just outside of net worth as part of annual expenses. After all networth tells you nothing without expenses. If I have 1 m in networth, no sources of income, and spend a million a year I’ll be just as broke next year. I do consider rental properties part of net worth however.

    1. See my comment above (commenter #2). I sold stock to pay for the down payment on my home. I’m not sure why I wouldn’t include it in my networth. One doesn’t have to buy a home. One could cash out on the home at any time and just become a renter.

      1. The thing is if you reduce your expenses and increase your networth based on the home purchase you’ve double counted. You can’t have it both ways because if you sell the home the expense comes back.

  66. I understand the points you make in this article. However, in calculating my net worth I prefer to be as conservative as possible. After all, the point of determining your net worth is to understand how your finances add up, thus determining how you are able to retire or plan out your lifestyle.

    Property and real estate carry value, without a doubt. However, they can be highly illiquid. They carry enormous liability by way of taxes, utilities, maintenance, insurance, etc. Factors outside of the owner’s control can significantly sway the market value of property. Consider recent changes that are likely to impact home prices significantly moving forward: SALT deductions being capped; interest rates on the rise (over 4% average); and a local area’s economy.

    For these reasons, I calculate my net worth separate from my property value. I then have a separate column to account for estimated equity at current market rates less 10% selling commissions (again conservatism) with an additional 15% +/- range to show the uncertainty of the asset’s true value.

    Just what works for me, but I appreciate and enjoy reading your thoughts on the subject.

  67. We’re current renters. I would consider one’s primary residence as part of his/her net worth, but the net of the home value minus liabilities.

    I know some people who say they “own a $400k house or condo”, which they’ll include the full value in their net worth. But they still owe $350k on the mortgage.

    1. The Professor

      Excellent point Mike. The way I also value my home is what amount of money would I receive after selling? I take in closing costs, any Realtor fees, taxes,( if any), then minus any amount left on the loan. It’s more accurate.

  68. That’s interesting. I can see why wealth managers don’t to include your home in the net worth calculation. Your home clearly is an asset, though. As a last resort, you can take out a reverse mortgage to help fund your retirement.

    The graph of renter VS homeowner is interesting. I think it’s because Millennials had it rough. Now that they’re starting to build a family, the number of homeowners should increase. IMO.

  69. This is a great post Sam. I really learn a lot about finance when I come here.

    I would think net worth would include the value of any paid for asset, and would be calculated as such at whatever specific time the question is asked. So if you rent there would be no negative balance carried along with you because of how long you rented for, and if you owned a property with some amount of equity that would be included as well.

    I guess I just don’t understand why you would carry a negative balance that grows with how long you had rented for. It doesn’t actually matter for the calculation of net worth, right? I get that you aren’t getting that rent money back, but it doesn’t really matter for a calculation that’s specific to that point in time.

    1. Recovering Engineer

      You’re not carrying a negative balance that grows. I think his point is, if your home has no value in your net worth for the owner than the present value of your FUTURE rent payments should be carried as a negative value for the net worth of the renter. To make it an apples to apples comparison the homeowner is getting no credit for the asset so the offset would be for the renter to be penalized for the future liability.

      1. I think I understand better now RE. So you are saying that calculating this way allows for a more accurate comparison between people who own and people who rent, compared to calculating it independently.

        Thank you for clarifying! :)

  70. For calculating total net worth it’s important to include a primary residence for the purpose of tracking consistency. If you purchase a property and use $200,000 for the downpayment your net worth calculations month to month doesn’t change. The value moves from one line item to another under the assets column. But if we calculate net worth without accounting for equity in primary residence then your net worth drops $200,000 immediately after buying the home. It’s kind of weird. There would be so much fluctuation to one’s wealth whenever moves to a different home. But for calculating liquid net worth I would not include any type of real estate. Both measures of net worth are important for different reasons.

  71. Currently, I am renter but see nothing wrong with a home being included in net worth if properly valued.

    Properly valued being an asset and corresponding liability, with an extra discount in their for sunk costs, fees and broker commissions to sell. Essentially, your net realizable value.

  72. Daniel Cohen

    Just realize that in 30 years you will kick yourself for not owning a primary residence just like you will kick yourself in 30 years if you don’t own stocks.

    Response: Hi Sam, I believe you can get in big trouble with that statement. There is an applied assumption that our population and inflation continue to grow. My personal opinion is that we do not know the future. It is completely possible the changes in the environment caused by humans will finally start impacting our population in the next decade or three. Should our population start going down, that would definitely have an impact on both house prices and stock market value. it could cause someone to be kicking themselves for not renting. However, all signs are currently pointing in the direction of population and inflation growth today. So, you are probably right in your assessment for now. I will contact you in 30 years and take you out for beer if you are right. :-)

    1. Sounds like you may be placing too much stock in agenda driven news. IN YOUR LIFETIME, the (I think silly) worry of global warming will not affect you or your wealth one iota. Bet on the future. Assuming you are in USA, this is place to be. People want to be here, despite what hateful news media claims. There will always be people willing to pay to live in the planets desirable locations. Sure there will be short term fluctuation but who cares.

      You only get to live once – don’t let the agenda driven media makers do your thinking for you.

  73. Nicoleandmaggie

    In the rand version of the health and retirement study, they provide both measures: total wealth and non housing wealth. They’re both important measures.

  74. Eh, you’re splitting hairs here. Like “Should I count my 20 year old clunker car as part of my net worth?” Being a unique guy what can I say?
    I’m in a unique situation where my house is my “family homestead” and has been here for more than half a century. Basically I’m not moving and I’m gonna die here eventually. I never count it as part of my net worth and indeed as a House it’s not worth much as anyone buying it would instantly demolish it to build a state-of-art plastic McMansion in its place to blend in with the rest of the neighborhood. (Stealth Wealth, remember: don’t judge me by external appearances!) Not worth much BUT the land/location is where the Wealth is contained. Good location. Good property. I wouldn’t sell it for anything less than a million. But I Have No Intention Of Selling It. At my stage in life it’s almost an extension of myself (as if I’m a cyborg or something). In my situation, therefore, you could say that I regard it as Emergency Last-Ditch Net Worth akin to selling a lung or other body organ for money if I Really need to, which I most likely won’t.

    1. if you can get a $1M reverse mortgage against it (as last ditch effort), then it is part of your net worth. Even if your ‘real’ assets were close to zero, you’re still in much better shape than most Americans.

    2. You either need to count it as part of your net worth or count renting as a significant negative net worth. Given that you could sell your place, take out money against it, do a reverse mortgage, etc, I think you should count it as part of your net worth.

  75. I rented for years before buying a home. I sold some very good stocks such as Apple and others for the down payment. I think networth wise I would be worth more if I had held those stocks used for the down payment and stayed a renter.

    1. Yes, but you’d be glad you used those stocks IF the market had been doing poorly. I would have done the same thing, even in hindsight.

      1. Not really, I traded something that grows at a faster rate for something that grows at a slower 3 to 4 percent a year rate. It made me more diverse but in hindsight it’s still not a great move. I may make a similar move on a second home around 2019 though I know in advance it’s not a great move.

        1. One thing to consider: if your home value grows at 3% but you leveraged it by only putting 10% down, your true cash-on-cash return is 30%.

          1. That’s a gross oversimplification, assuming your home value didn’t grow instantaneously by 3% when you purchased it. A correct calculation would be Down Payment + Any subsequent mortgage payments (both principal and interest) + Subsequent Taxes paid + Maintenance costs + remodeling costs – tax deductions.
            Basically, you have to include all costs associated with the investment, not just the down payment, for a true cash-on-cash return.

            1. that’s not really correct, either Kirk.

              You need to subtract out the rent you would be paying otherwise. In the world of < 4 mortgage rates, it was a gimme to pay 168k to give up my apartment in SF for a home. It paper appreciated 500k in less than 5 years, while rents nearly doubled (for non controlled apartments). The 3500 for a one bedroom place exceeds my costs for a 3/2 home with a 2 car garage and a yard.

              The leverage is real, and it's the problem for would be home buyers in expensive locales. When million dollar homes are increasing by 5%/year, that's 50k more next year. If you're saving 20k/year for a down payment, that's not good. It's correct that much of the appreciate for a home owner is lost in a swap to another house in the same region. But how much easier is it for that person, rather than the renter?

              I also was underwhelmed by the lack of repairs done by my landlord in the 9 years I was there. Even a failed freezer took a month to resolve. I'd have happily shared some costs of renewal (carpet), but wouldn't do it on my dime only.

  76. Sam,

    I liked the post but I truly do not care what a wealth manager or a socialist thinks. You are correct in that the manager is there to collect fees and a socialist will never acknowledge how terrible their ideology is despite the evidence presented over and over and over again.


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