Author Topic: House as percentage of AA  (Read 1174 times)

FrugalFisherman10

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House as percentage of AA
« on: June 29, 2018, 05:24:36 PM »
This may seem like a dumb question and maybe I'm just being really dumb here , but how should you consider a house in terms of your overall asset allocation?

I've heard it said that if you own a house/mortgage, then well, that's part of your AA and it's allocated to "Real Estate"...

But what part of it is?

For example, If the equity you have in your home is 20% of your total net worth, then do you have 20% of your AA in Real Estate? Is that how one should think about it?

Or is it the VALUE of your house that should be considered?

Or the value of your EQUITY  + your MORTGAGE, but not necessarily the current market value of your home?

Is it worth considering this as part of AA at all, when its not necessarily going to "behave" like an actual REIT or some portfolio of rental properties would (those things I typically think of assets in the "Real Estate " bucket)?

I don't think you can say "I'm 100% equities" when you own a home or a have a mortgage, just not sure how to quantify it. Perhaps you're really 80% equities, 20% real estate. (At a high level)
Thanks for any thoughts!

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ysette9

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Re: House as percentage of AA
« Reply #1 on: June 29, 2018, 05:30:16 PM »
Personally I feel that when people say things like "I'm 100% in equities", they are talking about their invested assets. A house you live in is not an investment, it is shelter. My investments are the moneys I set aside for long-term goals, moneys I put in things like stock and bond funds.

To continue getting nit-picky about language, my house is a part of my overall net worth, and for that I count the equity that I have.

Retire-Canada

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Re: House as percentage of AA
« Reply #2 on: June 29, 2018, 06:05:31 PM »
For example, If the equity you have in your home is 20% of your total net worth, then do you have 20% of your AA in Real Estate? Is that how one should think about it?

Currently my home equity is ~20% of my NW. I don't consider it in my asset allocation since my AA is for invested assets only. It's not like I am going to suddenly pull out 5% of my home equity if it climbs to 25% of my NW and my target was 20%.

I need a place to live. That's my house. I don't plan to sell it to fund my retirement unless shit gets really grim so it's not part of my AA at all. I am 100% equities in terms of AA despite having a mortgage. My net worth is not 100% equities. It's 80% equities and 20% home.
« Last Edit: June 29, 2018, 06:21:00 PM by Retire-Canada »

effigy98

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Re: House as percentage of AA
« Reply #3 on: June 29, 2018, 06:20:09 PM »
I think I read the average is around 60% right now. In 2009 I was at 20%, now at 80%+ and climbing much faster than my stock investments. Seattle market is crazy. I have thought about cashing out and moving to stocks, but with the Shiller PE Ratio being over 30 right now, not very excited to do that.
« Last Edit: June 29, 2018, 06:22:40 PM by effigy98 »

DreamFIRE

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Re: House as percentage of AA
« Reply #4 on: June 29, 2018, 06:57:50 PM »

I'm in a LCOL area as far as houses (but not for property taxes).  My house is about 10% of my net worth.  My house is 0% of my AA / stash.

JAYSLOL

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Re: House as percentage of AA
« Reply #5 on: June 29, 2018, 07:45:16 PM »
I would consider a rental house, or perhaps even a rental suit in my actual house as part of my AA, but not where I live.  If I owned a house worth 400k, and it had a 1 bed rental suit in it I might consider 100k or 150k of the value of the home to be a part of my AA.  I would count my house as a part of my net worth, but never as a part of my invested net worth, which is where AA comes into play. 

Finances_With_Purpose

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Re: House as percentage of AA
« Reply #6 on: June 29, 2018, 11:45:38 PM »
I would consider a rental house, or perhaps even a rental suit in my actual house as part of my AA, but not where I live.  If I owned a house worth 400k, and it had a 1 bed rental suit in it I might consider 100k or 150k of the value of the home to be a part of my AA.  I would count my house as a part of my net worth, but never as a part of my invested net worth, which is where AA comes into play.

This.  I do think it's somewhat fair to consider your house as essentially a bond that you don't plan to ever spend/cash in.  It's something you own without expecting a return from it unless you're using it in part as a rental or something.  For most purposes, it's more helpful not to think about your house at all as an asset or in terms of allocation. 

matchewed

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Re: House as percentage of AA
« Reply #7 on: June 30, 2018, 06:27:30 AM »
I think your house (the one you live in) generally is not part of an AA. It is fulfilling one of the needs (keeping you from dying of exposure). That isn't to say that it can't be if you somehow either rent it out and want to include it as real estate investment.

My only difficulty with income generating properties is that the value of the property isn't really (IMO) something that is categorical in an asset sense. It's more about the cashflow. EX: I own a property that cost 150k and generates 1k/month or I could own a property that costs 250k and generates 100 a month. Having more money invested in the more expensive property does not necessarily mean your AA is in a better position.

For my purposes in my IPS I try to keep the real estate as a note about cashflow or income generation. I may try to target a certain amount of income per some time frame and then say I will invest in X type of properties that meet a certain criteria to get to that income generation.

aboatguy

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Re: House as percentage of AA
« Reply #8 on: June 30, 2018, 08:50:24 PM »
I don't count my house in my AA.  Now if I had rentals or a vacation house I would consider them part of my AA.

jacoavluha

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Re: House as percentage of AA
« Reply #9 on: June 30, 2018, 09:15:55 PM »
Some do find it helpful to consider their house as part of their overall asset allocation. Some advocate considering a mortgage as part of a bond allocation (albeit a bond with a negative yield). And in a way this makes sense.

You might find this short post from Harry Sit helpful. Or, some of the other articles linked from his post.

harvestbook

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Re: House as percentage of AA
« Reply #10 on: July 01, 2018, 06:18:57 AM »
I consider my house not an asset but a necessary liability (whose cost I want to keep as low as possible.) How can it be an asset if I still need to live somewhere? If I sell my house, I will either need to buy another house or rent a place, taking on a similar ongoing liability. For that reason, I don't even consider it part of my net worth, because it will pass to my wife or children. I suppose if children get it and they already have a house, it become a temporary liability that can be sold as an asset. I own a paid-off second home and it is definitely a pure liability.

I suppose if one plans to sleep under a bridge, then selling a house might be considered an asset.
« Last Edit: July 01, 2018, 06:20:46 AM by harvestbook »

SubL stache

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Re: House as percentage of AA
« Reply #11 on: July 01, 2018, 10:15:02 PM »
My house is about 45% of my net worth, only this year did investments become my largest net worth item, not good for taking advantage of compound interest, but I'm relatively new around here.

Finances_With_Purpose

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Re: House as percentage of AA
« Reply #12 on: July 02, 2018, 09:59:48 PM »
I consider my house not an asset but a necessary liability (whose cost I want to keep as low as possible.) How can it be an asset if I still need to live somewhere? If I sell my house, I will either need to buy another house or rent a place, taking on a similar ongoing liability. For that reason, I don't even consider it part of my net worth, because it will pass to my wife or children. I suppose if children get it and they already have a house, it become a temporary liability that can be sold as an asset. I own a paid-off second home and it is definitely a pure liability.

I suppose if one plans to sleep under a bridge, then selling a house might be considered an asset.


The logic goes this way: you have to live *somewhere*, and if your house is paid for, it could save you on an imputed cost (shelter).  For instance, you either pay rent or you pay for a house.  Or you freeload.  (Most of us don't see living under a bridge as acceptable, after all.)  You can get ahead financially once you no longer pay for rent and don't have a mortgage. 

But, that means the return would be low by nature, especially once you get beyond the cost of a basic/minimal place to live.

matchewed

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Re: House as percentage of AA
« Reply #13 on: July 03, 2018, 02:35:38 AM »
I consider my house not an asset but a necessary liability (whose cost I want to keep as low as possible.) How can it be an asset if I still need to live somewhere? If I sell my house, I will either need to buy another house or rent a place, taking on a similar ongoing liability. For that reason, I don't even consider it part of my net worth, because it will pass to my wife or children. I suppose if children get it and they already have a house, it become a temporary liability that can be sold as an asset. I own a paid-off second home and it is definitely a pure liability.

I suppose if one plans to sleep under a bridge, then selling a house might be considered an asset.


The logic goes this way: you have to live *somewhere*, and if your house is paid for, it could save you on an imputed cost (shelter).  For instance, you either pay rent or you pay for a house.  Or you freeload.  (Most of us don't see living under a bridge as acceptable, after all.)  You can get ahead financially once you no longer pay for rent and don't have a mortgage. 

But, that means the return would be low by nature, especially once you get beyond the cost of a basic/minimal place to live.

Right got it. If you no longer had to spend money on your housing it would save you that cash once that occurs. But the question is in regards to the value of the house and the mortgage and how it is factored into an AA.

 If it isn't paid off it is a necessary expense not an asset worth accounting for in the allocation as it in of itself does not generate a return.

If it is paid off then it is an appropriate reduction of expenses and it still does not generate a return.

That probably covers most scenarios.

1WattLightbulb

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Re: House as percentage of AA
« Reply #14 on: July 03, 2018, 02:09:38 PM »
We should keep in mind that the % of net worth of the house matters when we evaluate how risky we're being with our assets. If I decided to pay off my house ASAP, I would be reducing my risk level. If one has 80% of their NW in their house and 20% in equities, that's probably more conservative than the reverse. But it depends on the equities the property/location. Whether or not one puts it in a separate category, it kinda matters when thinking about risk tolerance.

Retire-Canada

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Re: House as percentage of AA
« Reply #15 on: July 03, 2018, 02:14:59 PM »
If one has 80% of their NW in their house and 20% in equities, that's probably more conservative than the reverse.

So investing in thousands of the best companies in the world spread across the globe is less conservative than holding most of your NW in one house in one location on the planet? That isn't how I'd look at it.

matchewed

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Re: House as percentage of AA
« Reply #16 on: July 03, 2018, 02:38:34 PM »
We should keep in mind that the % of net worth of the house matters when we evaluate how risky we're being with our assets. If I decided to pay off my house ASAP, I would be reducing my risk level. If one has 80% of their NW in their house and 20% in equities, that's probably more conservative than the reverse. But it depends on the equities the property/location. Whether or not one puts it in a separate category, it kinda matters when thinking about risk tolerance.

Unless you sell or refinance or HELOC or rent it out it doesn't matter one diddlysquat how much of your NW is tied into your home. You can't access it unless you do one of those things which then converts that NW to cash or cash flow. In fact a 100% owned house can only reduce your expenses by the mortgage payment amount and the previous statement still applies.