Author Topic: Do you include the value of your home when calculating when you will reach FI?  (Read 4699 times)

brendon

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Do you include the equity in your home when calculating when you will reach FI?

Im interested in opinions on how people view the equity in their home in relation to FI. The way I see it it proably shouldnt be included unless I was to sell up and invest the money in index funds so I can apply the 4% rule.

Specifics about me but not necessarily the question,
I have fully paid off my home and live in a city where rents are crazy expensive.


MDM

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brendon

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Thanks, thats exactly the question/thread I was looking for.

soccerluvof4

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I keep it in the back of my head more for shits and giggles but the simple answer which I am sure you found on that thread is you need to live somewhere so unless your going down from a mc mansion to something smaller thats the only calc I would consider
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Goldielocks

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Regardless of what we should do, I find that approaching FIRE,  I think of housing as an expense. In my HCOL area, the only way to be mortgage free is to divert half my investments to it.

Instead , I budget for it like rent in my FIRE calc, with a fall back plan to rent rooms, sell and downsize, or sell and move farther out.

Metric Mouse

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Do you include the equity in your home when calculating when you will reach FI?
No. The equity in my home does not factor into my being FI.
Give me one fine day of plain sailing weather and I can mess up anything.

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jim555

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I think house equity should be included.  I plan on eventually selling and renting in the future so it should be considered in available funds to be spent.

BeginnerStache

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I don't. However, we plan on having enough equity that when we sell, downsize (again) and move to a LCOL, we plan on having little to no mortgage payment. Since we cannot project housing cost that far into the future, it's hard to include it into current FIRE numbers.

sol

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Not the equity, but I have to track the value.  Because the value determines what I will pay in taxes, and that's an ongoing expense.

I'm this context, my expensive home is a liability, not an asset.  It does not help me retire earlier, but it does cost me s big pile of money each year to keep.

soccerluvof4

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^ very good point SOL
" In life you don't get what you deserve you get what you negotiate"

Exflyboy

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For me we have the additional "problem" of getting rent from the two rentals on my place.. I estimate the property is worth say $400k. But then I get $16k/yr in rent.. plus a "free" ish place to live as its paid off.

So 4% of 400k is 16k.. So its worth a lot more us to keep it than to sell it.

But the short answer is I ignore it in NW calcs.


Weathering

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No only do I ignore the equity in FIRE income calcs, but before I had it paid off I used to subtract the amount still owed from my net worth used to calculate FIRE income.

FernFree

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I include mine on both sides of the balance sheet -- cost to live in it to determine money needed for FIRE (including maintenance) and on the asset side I include the equity minus a good chunk for closing costs/necessary upgrades if I were to sell it.

I feel fairly confident doing this because:
1. The equity is a relatively low % of my overall stache.  Around 10% - 15% of total.
2.  Assumptions for stache growth are generally that over time you will average at least 4% growth plus inflation, and my home is in a high-growth city with great employers in the area (Austin TX suburbs), so I feel comfortable with this assumption for the future growth in the value of my home.  That growth would be on the overall value, not just the equity so that creates an extra confidence level.  For example, if the equity that I'm counting is 50% of the value of the house, an increase in house value of 2% + inflation will cover my 4% MWR.
3.  Within about 10 years of FIRE I expect that I will move or travel and will either rent the home or sell it.
4.  If I faced a few years of poor returns and things weren't looking good, I wouldn't hesitate to sell the home to access the funds.



Greystache

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I treat my home equity as part of my "safety margin". If something goes seriously wrong we could sell the house and down size or rent and tap a portion of the $600K equity. However, I did not consider myself FI until I could cover all by budget requirements with my investment portfolio and cash.

NorCal

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The way we look at it is that we have a savings goal of $1.2M plus a paid-off house.  We do it this way because we don't know where we'll be living at the time.

If we already owned the house, we would state it as a savings target of X plus the balance on the mortgage. 

Clean Shaven

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We're using the home value in the calculations. Current value around $980K (paid off, go ahead and face punch all you want). Expect to downsize and extract $500K in around 15-20 years. Using firecalc future one time income to account for this, so we expect to use a higher initial withdrawal rate from other investments yet still have a high probability of success.

Retire-Canada

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Do you include the equity in your home when calculating when you will reach FI?

I don't count my home value in any way when considering my FI target $$, but I do count taxes, maintenance and the mortgage payments as expenses. It's possible I will move to a LCOL area at some point and benefit from the difference in housing values, but I have no firm plans so there is no point trying to factor this in.

If I was single I would happily sell the house and hit the road for a decade or so. If that was possible I'd count the home equity [less selling costs] as part of my FIRE stash since I would be accessing it as part of the plan. So far my GF and my cat aren't buying into that idea.

dude

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Not the equity, but I have to track the value.  Because the value determines what I will pay in taxes, and that's an ongoing expense.

I'm this context, my expensive home is a liability, not an asset.  It does not help me retire earlier, but it does cost me s big pile of money each year to keep.

Yep, this ^^^.  The equity in our house is nothing but a paper exercise for me.  All I really consider as far as FIRE plans go is sources of future income streams, i.e, pension, investments, SS.

Sure, the equity in our house offers a certain psychological security, knowing that we could likely liquidate it fairly quickly to access the cash, but that to me would mean my FIRE plans went totally awry.

Spork

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I track every single thing I can think of... obsessively.

I track the value of my home in net worth.  I have zero plans of selling it ever.  And if I did, I'd likely buy another... so that money is "unusable."  Hence, when it comes to FIRE numbers, I track "financial assets" and "Non-financial assets".  The latter includes house and cars and I don't use those numbers towards determining my FIRE nest egg.

The cool thing about computers is: You can track both.  If you are doing calculations on regular intervals, more data is better.  You plop your raw data in a computer program/spreadsheet/tracking tool and let it figure out data in multiple ways.  I've been tracking for over 20 years.  It's often nice to have data from way back and it can be difficult to re-create.  It's easier to gather the data and never use it than to go back through your books and re-create it.

You might think it's best to not include your home value, then when you hit 55, you might decide to sell your big expensive home and downsize.
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Metric Mouse

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No only do I ignore the equity in FIRE income calcs, but before I had it paid off I used to subtract the amount still owed from my net worth used to calculate FIRE income.
Nice. That is a unique way to track things.
Give me one fine day of plain sailing weather and I can mess up anything.

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Nangirl17

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The equity in our house is strictly a fallback plan in case the 4% rule fails or some enormous catastrophic expenditure becomes necessary in retirement and employment is impossible.

Frugal_is_Fab

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We are selling a house in California buying in Florida for 1/2 the money.   The 1/2 not invested in a new property in Florida will be invested with Peerstreet at at yield of around 8% for 24k per year extra income initially.  I then plan to use the "Principal" to pay my taxes as I roll over my IRA to Roth IRAs while living in Florida maxing the 25% bracket each year.   The entire "nest egg" from the home sale will be needed for taxes eventually but I'll have really big Roth balance when it's all done.   I'll need about 30k each year for taxes so over 10 years so the 24k extra income will drop about 10% a year and We'll pull from other sources.

MoneyStacher

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I include mine and always have. I was always ready to sell it and what I had in it for FIRE. And, I wanted to FIRE so bad when I had my corporate job and my index fund equities alone were not enough to fuel good daydreaming. Now, I'm renting it and continue to include the equity in my numbers. I'm single though so the home was just a crash pad while holding down the corporate job.

steveo

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No only do I ignore the equity in FIRE income calcs, but before I had it paid off I used to subtract the amount still owed from my net worth used to calculate FIRE income.
Nice. That is a unique way to track things.

I think that is exactly the way that you have to do it. I definitely did the same thing. FIRE assets don't include your house but all liabilities should be included. I do though recognise that I can sell my house and downsize and have more money but I see that as buffer.

peabody58

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I track the value only, which includes all the updates/improvements we've made.  We retired 2 years ago (FIRE at 57] and have already downsized to our current home in a 55+ community.  The house is paid off.

We look at the house as our ultimate Long Term Care policy.  The equity will be used if needed to fund any LTC costs if and when that time comes.  Meanwhile, we are enjoying the heck out of it and love downsizing from 3400 sf Victorian money-pit to 1500 sf perfect ergonomic energy efficient design.
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merlin7676

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Not at all nor do I include it in my net worth.  The reason being is that it's not really an asset until you sell it.  And depending on when/the RE market/other factors you never really know how much you'd get for it anyway.  Also you have to live somewhere anyway. So even if you sell it, you'll have to buy something else to live in even if it's a RV or yurt or whatever.

Itchyfeet

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I do, but only because moving to a cheaper place is part of my FIRE plan. I deduct what I will budget for my new house. Ultimately my home doesn't generate cash to pay the bills.

Cassie

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We do because we could sell and buy a condo or rent so definitely an asset that  we would use if we needed too.

frugal_c

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I would only include the amount that you can extract.  Like Cassie's situation for instance.   If you have a home valued at say $300k and you would be willing to move to a place worth $200k then I would count the $100k.  You just have to be SURE that you are willing to move to a cheaper place and deduct any real estate/moving expenses from the amount. 

If you have a place and that is it, you are not willing to downgrade then no, don't include any equity.
« Last Edit: March 04, 2017, 09:42:19 AM by frugal_c »

Retire-Canada

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Unless you actually have a fairly firm plan on selling your house and where you are moving to specifically with research done on neighbourhoods/housing prices/etc... I wouldn't include it. It's easy wave you hands and say we'll move somewhere LCOL - BOOM NW goes up $300K, but without a detailed plan you could just be fooling yourself. In other words if you haven't bothered to come up with a plan you haven't earned the equity.

Have you?:

- considered realtor fees
- costs to fix up house for sale
- taxes
- moving costs
- visited your planned destination and spent some time there
- picked out neighbourhoods/schools
- validated current pricing
- had a serious talk with your SO/kids and reached agreement on the move plan

Itchyfeet

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Unless you actually have a fairly firm plan on selling your house and where you are moving to specifically with research done on neighbourhoods/housing prices/etc... I wouldn't include it. It's easy wave you hands and say we'll move somewhere LCOL - BOOM NW goes up $300K, but without a detailed plan you could just be fooling yourself. In other words if you haven't bothered to come up with a plan you haven't earned the equity.

Have you?:

- considered realtor fees
- costs to fix up house for sale
- taxes
- moving costs
- visited your planned destination and spent some time there
- picked out neighbourhoods/schools
- validated current pricing
- had a serious talk with your SO/kids and reached agreement on the move plan

I appreciate where you are coming from, however, i don't think a completely nailed down plan is essential.

For us, we live in an expensive suburb in an expensive city. We know we will leave when we FIRE amd move somewhere significantly cheaper but don't know where.

Our lack of certainty does not stop us defining a reasonable budget for a house, after taking fees and taxes into account.

We will be retired for a long time we hope. It is unlikely we will live just in one more place, and it is quite possible we will live in the HCOL house for a few more years before moving.

We will have a stash that affords a little flexibility on all fronts.

PizzaSteve

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Do you include the equity in your home when calculating when you will reach FI?
No. The equity in my home does not factor into my being FI.
Same for me.  Lots of equity, possible useful for leverage, but we dont plan to move, so worth $10k or $10M doesnt matter other than for taxes.
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Clean Shaven

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I appreciate where you are coming from, however, i don't think a completely nailed down plan is essential.

For us, we live in an expensive suburb in an expensive city. We know we will leave when we FIRE amd move somewhere significantly cheaper but don't know where.

Our lack of certainty does not stop us defining a reasonable budget for a house, after taking fees and taxes into account.

We will be retired for a long time we hope. It is unlikely we will live just in one more place, and it is quite possible we will live in the HCOL house for a few more years before moving.

We will have a stash that affords a little flexibility on all fronts.

This is pretty close to our situation, and I too appreciate Retire-Canada's points, but agree that it isn't a black-and-white determination.

For us, we live in a facepunchworthy $1MM house (in a neighborhood full of them), near a city where perfectly nice houses sell for $400K, and crapshacks sell for $200K.  We intend to stay in the area, but downsize at some point to a smaller and less expensive house.  We're ballparking extracting $500K in equity at some point, and that is the amount we are factoring into firecalc-type calculators. 

Even if we omit the $500K future equity influx into the stash, it doesn't change firecalc success % numbers by all that much.  We go from something like 95% success to 90%.  I am comfortable with those numbers.  Flexibility is key.

frugal_c

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Quote
Even if we omit the $500K future equity influx into the stash, it doesn't change firecalc success % numbers by all that much.  We go from something like 95% success to 90%.  I am comfortable with those numbers.  Flexibility is key.

It is similar with us but with a lower home equity amount.  I plan to get to retirement without needing the home equity but I include it in a bad case scenario.  If stocks are brutal or we save substantially less than expected it's something I consider.  Work an extra couple years, a little bit less travel money, extract some home equity and all will be well.

WhiteTrashCash

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Yes, the value of my home factors into my FIRE ambitions. Someday, I will sell my house and use the money to help finance my retirement. That's why I own a house. Otherwise, I would just rent.

Retire-Canada

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Even if we omit the $500K future equity influx into the stash, it doesn't change firecalc success % numbers by all that much.  We go from something like 95% success to 90%.  I am comfortable with those numbers.  Flexibility is key.

I would agree that if your FIRE plans don't require you to use any home equity you don't need a firm plan around selling the house and moving.

jim555

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Even if it is not in your plans it should still be considered.  Home equity can be a substantial portion of net worth.  Not considering it will give a distorted picture of where you stand.

Retire-Canada

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Even if it is not in your plans it should still be considered.  Home equity can be a substantial portion of net worth.  Not considering it will give a distorted picture of where you stand.

The title of this thread is "Do you include the value of your home when calculating when you will reach FI?". Unless you have a firm plan to sell your house and fully understand how much of that equity is actually available to you as opposed to being needed for your next house how do you use that equity value to calculate when you reach FI?

If you said "I'll wargame out several possible scenarios and see what they look like." I'd buy that. If you just dump all your home equity - say $500K - in with $700K investments that doesn't give you a true picture of where you stand either.

When calculating FI I don't use my home equity. I do use it to calculate my NW for shits and giggles because it's a higher number, but I am aware even in the most radical scenario for me [sell house, buy RV, hit road] I have to deduct cost of realty fees and cost to purchase a RV from my equity before I would have a useful number for FIRE planning.
« Last Edit: March 04, 2017, 07:43:32 PM by Retire-Canada »

Dicey

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No. Mainly because I'm already FIRE. After years of working for the goal before all these cool calculators existed, it finally just happened. It actually took me by surprise.
I did it! I have a journal!
http://forum.mrmoneymustache.com/journals/a-lot-like-this/
And hell yes, I am still moving confidently in the direction of my dreams...

Mmm_Donuts

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Even if it is not in your plans it should still be considered.  Home equity can be a substantial portion of net worth.  Not considering it will give a distorted picture of where you stand.

The title of this thread is "Do you include the value of your home when calculating when you will reach FI?". Unless you have a firm plan to sell your house and fully understand how much of that equity is actually available to you as opposed to being needed for your next house how do you use that equity value to calculate when you reach FI?

If you said "I'll wargame out several possible scenarios and see what they look like." I'd buy that. If you just dump all your home equity - say $500K - in with $700K investments that doesn't give you a true picture of where you stand either.

When calculating FI I don't use my home equity. I do use it to calculate my NW for shits and giggles because it's a higher number, but I am aware even in the most radical scenario for me [sell house, buy RV, hit road] I have to deduct cost of realty fees and cost to purchase a RV from my equity before I would have a useful number for FIRE planning.

I use our home equity in cfiresim calculations, because we plan on downsizing eventually. What I do is take a conservative estimate of half our house value now, and add it as "other income" in 20 years. Both the house value and year are estimates, but everything on cfiresim is an estimate. It's just a very conservative estimate.

For example, our house in Toronto is worth about (cough) $2MM right now. How can we not include it at all? In cfiresim I "only" value it at $1.5MM because I don't believe the past year's crazy run-up will stick. I increase the value by inflation only, over the next 20 years (very conservative). I assume we will be able to downsize to a place less than $750,000, thus extracting at least that amount as income.

IMO as long as I'm on the conservative side of these estimates, it's ok to use them. Nobody knows what will happen to house values in Toronto over the next 20 years, but I'm pretty sure it's safe to say we can somehow extract $750k. Even if the market for detached houses falls 60% over the next 20 years, we will still be ok, because we can sell and rent somewhere cheaper. If the market falls that hard, there will be super cheap places to rent elsewhere.

aceyou

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Do you include the equity in your home when calculating when you will reach FI?

Im interested in opinions on how people view the equity in their home in relation to FI. The way I see it it proably shouldnt be included unless I was to sell up and invest the money in index funds so I can apply the 4% rule.

Specifics about me but not necessarily the question,
I have fully paid off my home and live in a city where rents are crazy expensive.

I include it in my net worth, but not as part of my FIRE stache.  It serves the following purposes for me:

- A paid off house will reduce my annual expenses in FIRE, so even though it doesn't increase my stache, it helps my safe withdrawal rate. 

- It gives me a safety margin.  For example, if I have a paid off house worth 400k in 15 years, and something happens, I could sell the house and downsize to a 200k house.  Boom, my stache suddenly got a 200k boost, and I probably just reduced my taxes and utility bills at the same time.  Of I can sell it and pay for retirement home costs for quite a while.  Nice to have that card in the back pocket.