Do you count a paid off personal home mortgage as investment income?

[rob in cal]

   In figuring out how much money we have in investments, and what our investment related income is, I never know what to count my paid off home as?  If we rented, and had put all the money we put into paying off the mortgage on the house into stocks or other investments, obviously we'd count that as investment money.  So, my formula is to count our paid off house as an actual investment which saves us having to pay rent every month. An equivalent house to ours would rent for about 18 to 20 k a year, so I take that figure, back out 2.3 k a year in property tax, take out another 2k a year or so in home repairs, and come to an investment "income" of about 15 k a year from having a paid off house.   Is this an appropriate mustache approved analysis?  By the way, haven't read yet on the site if Mr Mustache himself has a paid off house, though I'd assume so, and whether this counted in his 800 k investment portfolio.
   

[arebelspy]

No, I would not count it.. it should lower your expenses, then the rest of your portfolio should provide for the rest of those expenses.

It seems very silly to me to add fake rent to your expenses, then add fake income from your paid off house. 

I would count it in net worth (though not liquid net worth/ portfolio net worth), and some wouldn't do that.  It's all personal preference.  But I personally wouldn't count "investment income" from a primary residence I wasn't renting out, but living in.

[rob in cal]

   Right, I understand the logic of it just going to lower monthly expenses.  However, the thing that bugs me with this form of asset accounting is what happens in the scenario where someone just rents instead and thereby accumulates a much bigger investment portfolio, but on the other hand has much higher monthly living expenses.  In this case their investment portfolio would be less significant in that they would have achieved that level through retaining and keeping higher ongoing and permanent monthly living expenses. 
   

[unpolloloco]

Short answer: Only if you include the same amount of expense as the amount you count as income.  So it really doesn't matter.

Long answer: http://en.wikipedia.org/wiki/Double-entry_bookkeeping_system

[chicagomeg]

I see what you're doing, and ultimately, it's just semantics, but I think you're doing a lot of unnecessary work. The only way I'd personally include home equity is if I lived in an expensive home and planned to downsize after retirement, and even then I'd only count the differential between the two costs.

[aclarridge]

   In figuring out how much money we have in investments, and what our investment related income is, I never know what to count my paid off home as?  If we rented, and had put all the money we put into paying off the mortgage on the house into stocks or other investments, obviously we'd count that as investment money.  So, my formula is to count our paid off house as an actual investment which saves us having to pay rent every month. An equivalent house to ours would rent for about 18 to 20 k a year, so I take that figure, back out 2.3 k a year in property tax, take out another 2k a year or so in home repairs, and come to an investment "income" of about 15 k a year from having a paid off house.   Is this an appropriate mustache approved analysis?  By the way, haven't read yet on the site if Mr Mustache himself has a paid off house, though I'd assume so, and whether this counted in his 800 k investment portfolio.
   

I thought about this before too and I think what you're doing makes sense as long as you're capturing all costs of ownership that aren't part of renting. There's no real point to doing it though aside from general interest, but I think you understand that.

[CorpRaider]

Seems like your only "income" is the foregone rent, as mentioned above.  The renter is in effect a lot more highly leveraged via current and future lease obligations.  But at least your rent won't be going up.  You could try and get a good estimate of value and then mark it to "market" based on the pace of inflation.  It's a problem with an illiquid investment that doesn't generate any cash flow and only "treads water" relative to inflation, generally speaking.

[steveo]

My take is to consider the mortgage as debt and not consider the house as an asset because you have to live somewhere. In saying that once you are mortgage free living expenses go down.

[arebelspy]

   Right, I understand the logic of it just going to lower monthly expenses.  However, the thing that bugs me with this form of asset accounting is what happens in the scenario where someone just rents instead and thereby accumulates a much bigger investment portfolio, but on the other hand has much higher monthly living expenses.  In this case their investment portfolio would be less significant in that they would have achieved that level through retaining and keeping higher ongoing and permanent monthly living expenses. 
 

...and?

Someone with 1MM who rents for 20k annual and has total spending of 40k (4% SWR) or someone who owns a paid off property worth 500k and has 500k portfolio and lives on 20k (still the same 4% SWR) is in the same situation.

All that matters is your SWR, and they are the exact same.  One has a higher portfolio (1MM) and spends 40k.  The other has 500k and spends 20k.

If the latter sold the 500k property and had 1MM (we're ignoring taxes for illustrative purposes) and then rented for 20k, they'd be in the same situation.  They are functionally identical.

The buy vs. rent comes down to if it makes sense to buy or rent in your area.  Counting some imputed "income" from a paid off house is silly - the benefit it gives you is reduced expenses, and your portfolio is smaller due to the tied up money in the equity, but you also need a smaller portfolio due to the reduced expenses.

It's six of one, half a dozen of the other.

So yes, count it in net worth, no, don't count it in your portfolio or as "investment income".  IMO, YMMV, BBQ.

[Hamster]

I probably sound like a parrot, but I agree with the others. Your home ownership shows up in reduced expenses. Assume it is not generating any income, and will appreciate at the rate of inflation. The exception would be if you are renting out part of your home and actually earning some investment return, then count that portion only.

The other scenario you would count your paid-off home as an "expense-covering" (not really income-generating) asset would be if you were doing a reverse mortgage... But that is generally for the elderly (FHA allows it for those aged 62 or older), and something that I don't think has any role in early retirement scenarios (but I could be wrong).

[honobob]

...and?

Someone with 1MM who rents for 20k annual and has total spending of 40k (4% SWR) or someone who owns a paid off property worth 500k and has 500k portfolio and lives on 20k (still the same 4% SWR) is in the same situation.

All that matters is your SWR, and they are the exact same.  One has a higher portfolio (1MM) and spends 40k.  The other has 500k and spends 20k.

If the latter sold the 500k property and had 1MM (we're ignoring taxes for illustrative purposes) and then rented for 20k, they'd be in the same situation.  They are functionally identical.

 

It's six of one, half a dozen of the other.

So yes, count it in net worth, no, don't count it in your portfolio or as "investment income".  IMO, YMMV, BBQ.

But as an owner you have appreciation.  As a renter you can expect increasing rental expenses.  If you are in a high appreciating area why wouldn't you count the $50,000+ annual appreciation against your expenses? 

[steveo]

But as an owner you have appreciation.  As a renter you can expect increasing rental expenses.  If you are in a high appreciating area why wouldn't you count the $50,000+ annual appreciation against your expenses?

My take is because you cannot use that money. You cannot use it to pay expenses so why state that you can. If the house increases by $50k you can't spend that $50k and if you do the $50k is gone. You are however living rent free and your expenses are therefore decreased by however much the rent would be for your house.

[Christof]

But as an owner you have appreciation.  As a renter you can expect increasing rental expenses.  If you are in a high appreciating area why wouldn't you count the $50,000+ annual appreciation against your expenses?

Expenses is money, property and stocks are value. The distinction between the two is often blurry, because we colloquially assign the same unit for money and value, that is USD for those in the US. Value doesn't have an inherent unit, though. Only when you convert value to money, you actually end up with a currency. There's a single operation that converts value into money, that is selling a value for money.

Any other time you assign a dollar amount to a value that is only an approximation to serve a specific purposes. For instance, you can't pay 1% of your physical home as tax, so the government assign a more or less arbitrary money amount to your property and taxes money accordingly. Or you want to get a feeling for how rich you are, so you convert all values into a common unit so that you end up with a single value that you can track.

A house doesn't appreciate $50,000 a year, just like a company doesn't appreciate billions, just because 0.1% of it's shares have been traded for a higher price.

[eyePod]

But as an owner you have appreciation.  As a renter you can expect increasing rental expenses.  If you are in a high appreciating area why wouldn't you count the $50,000+ annual appreciation against your expenses?

Your net worth would go up by 50k.  Nothing to do with your income/expenses/savings rate.

Edit: Also, why do you assume you're appreciating?  If your house is depreciating, do you count that as spending money? 

I look at the house just as I look at my roth.  If I don't invest anything into it for a month, then it doesn't get added into my savings rate calculation.  I do track my net worth though, and if the Roth goes up in value due to the stock market doing well, then my net worth goes up.

[oldtoyota]

   However, the thing that bugs me with this form of asset accounting is what happens in the scenario where someone just rents instead and thereby accumulates a much bigger investment portfolio, but on the other hand has much higher monthly living expenses. 
 

I'm not seeing the problem. If someone rents, that's their business. Do you think it's not fair to you or something because it'll look like they are further ahead?

I don't even count my home equity because I have to live some place.

[arebelspy]

But as an owner you have appreciation.  As a renter you can expect increasing rental expenses.  If you are in a high appreciating area why wouldn't you count the $50,000+ annual appreciation against your expenses?

Your net worth would go up by 50k.  Nothing to do with your income/expenses/savings rate.

This. 

One absolutely SHOULD count the appreciation in their buy vs. rent calculation.  Lots of times it's still better to rent (I.e. the opportunity cost on they money you'd use to buy is more than the appreciation).

But that buy vs. rent calculation has a loose affiliation at best with your SWR or "investment income" (the topic of this post).

[Spork]

Short answer: no, I do not.

My house is paid off.  When I compute retirement predictions, I ignore "non-financial assets" (a term I pretty much made up myself, thankyouverymuch).  In other words: I toss out my fixed assets: cars, house, tractor, etc.  Sure, I can sell these for some amount of money, but they are really non-income producing assets (some of which are depreciating non-income producing assets).

I'm really not planning on selling the house ever (though plans do change).  But even when I have lived in houses that I was planning on selling in X years, my assumption was that the house would be even-money.  In other words: I'd sell it for pretty much what I paid for it (and probably eat some other expenses along the way.) 

Now: if I had rental property, this would be another question entirely.  If I was in the habit of buying fixer-uppers and flipping them for a big profit: maybe.  But for a normal primary residence: no.

I do count my home equity (as well as those blasted cars) in my net worth calculations... but ... net worth is really just a feelgood thing for me.  It is something I can use to set and track goals.  But it doesn't mean a darn thing (to me) when it comes to ER.
 

[StarswirlTheMustached]

But as an owner you have appreciation.  As a renter you can expect increasing rental expenses.  If you are in a high appreciating area why wouldn't you count the $50,000+ annual appreciation against your expenses?

Your net worth would go up by 50k.  Nothing to do with your income/expenses/savings rate.

Edit: Also, why do you assume you're appreciating?  If your house is depreciating, do you count that as spending money? 

I look at the house just as I look at my roth.  If I don't invest anything into it for a month, then it doesn't get added into my savings rate calculation.  I do track my net worth though, and if the Roth goes up in value due to the stock market doing well, then my net worth goes up.

Around here, if your house is appreciating, that's an expense! We're taxed as a percentage of the assessed value of the home.

[Tyler]

   In figuring out how much money we have in investments, and what our investment related income is, I never know what to count my paid off home as?  If we rented, and had put all the money we put into paying off the mortgage on the house into stocks or other investments, obviously we'd count that as investment money.   

You're over-thinking it.

Quick sanity check : do you plan to also report your "income" from not paying rent to the IRS when you do your taxes?  No?  Then it's not income.  You're playing mental shell games.

Reducing necessary spending by owning a paid-off home is no less valuable financially than having the same amount of income. Stop fixating on counting as much as possible in the income column. Part of being master of your finances is being confident in the big picture.

[Hamster]

Around here, if your house is appreciating, that's an expense! We're taxed as a percentage of the assessed value of the home.

This is very commonly misunderstood. General property appreciation doesn't increase the amount of property taxes. Budget increases do.

The way property taxes are generally set in the US is:
A) the jurisdiction determines how much money they need from the property tax levy, based on their budget (e.g. The county needs $1 million in property tax revenue to cover their budget)
B) They determine the total appraised value of all properties in that jurisdiction (e.g. $2 billion total assessed value of all properties in the county)
C) Divide A by B to determine the "mill rate" (e.g $0.50 per $1000 of assessed value. This gives $1 million in revenue assuming everyone pays their taxes).
D) They send you your tax bill based on that mill rate. (e.g. $500 on a $100,000 home)

If the budget remains constant, and all properties appreciate at the same rate, then your mill rate goes down, and your total tax assessed is flat. For the above example, if all the properties doubled in value, to 4 billion, then the mill rate would decrease to $0.25 per $1000 of assessed value of your home. (i.e. $500 on your home that has doubled in value to $200,000)

Your taxes should only go up if your home increases more than the other homes around you, or (the most common reason) the jurisdiction increases their budget and decide they need more revenue. Since the budget will increase most years (inflation and expansion), the budget increase will often outstrip the general rate of home appreciation, so everyone's taxes go up every year.

It gets more complicated because you could have multiple entities assessing taxes - county, city, utility district, school district, etc.

Here's a specific example from Guilford, CT.
{edited to add link and more specific numbers}

[Rural]

Around here, if your house is appreciating, that's an expense! We're taxed as a percentage of the assessed value of the home.

This is very commonly misunderstood. General property appreciation doesn't increase the amount of property taxes. Budget increases do.

The way property taxes are generally set in the US is:
A) the jurisdiction determines how much money they need from the property tax levy, based on their budget (e.g. The county needs $1 million in property tax revenue to cover their budget)
B) They determine the total appraised value of all properties in that jurisdiction (e.g. $2 billion total assessed value of all properties in the county)
C) Divide A by B to determine the "mill rate" (e.g $0.50 per $1000 of assessed value. This gives $1 million in revenue assuming everyone pays their taxes).
D) They send you your tax bill based on that mill rate. (e.g. $500 on a $100,000 home)

If the budget remains constant, and all properties appreciate at the same rate, then your mill rate goes down, and your total tax assessed is flat. For the above example, if all the properties doubled in value, to 4 billion, then the mill rate would decrease to $0.25 per $1000 of assessed value of your home. (i.e. $500 on your home that has doubled in value to $200,000)

Your taxes should only go up if your home increases more than the other homes around you, or (the most common reason) the jurisdiction increases their budget and decide they need more revenue. Since the budget will increase most years (inflation and expansion), the budget increase will often outstrip the general rate of home appreciation, so everyone's taxes go up every year.

It gets more complicated because you could have multiple entities assessing taxes - county, city, utility district, school district, etc.

Here's a specific example from Guilford, CT.
{edited to add link and more specific numbers}

These are good points, but there are even more complicating factors: the tax is on the appraised value, which often bears little to no relationship to the market value we try to figure out when we're looking at new worth. Some people fight the appraisals, with varying degrees of success which often depend on who you are (no bitterness here; I've successfully fought appraisals in two of the last three years). That means that everyone's property may appreciate at the same rate, but some will have more of an increase in taxes than others, even if the mils remain the same.

[StarswirlTheMustached]

Around here, if your house is appreciating, that's an expense! We're taxed as a percentage of the assessed value of the home.

This is very commonly misunderstood. General property appreciation doesn't increase the amount of property taxes. Budget increases do.

The way property taxes are generally set in the US is:
A) the jurisdiction determines how much money they need from the property tax levy, based on their budget (e.g. The county needs $1 million in property tax revenue to cover their budget)
B) They determine the total appraised value of all properties in that jurisdiction (e.g. $2 billion total assessed value of all properties in the county)
C) Divide A by B to determine the "mill rate" (e.g $0.50 per $1000 of assessed value. This gives $1 million in revenue assuming everyone pays their taxes).
D) They send you your tax bill based on that mill rate. (e.g. $500 on a $100,000 home)

If the budget remains constant, and all properties appreciate at the same rate, then your mill rate goes down, and your total tax assessed is flat. For the above example, if all the properties doubled in value, to 4 billion, then the mill rate would decrease to $0.25 per $1000 of assessed value of your home. (i.e. $500 on your home that has doubled in value to $200,000)

Your taxes should only go up if your home increases more than the other homes around you, or (the most common reason) the jurisdiction increases their budget and decide they need more revenue. Since the budget will increase most years (inflation and expansion), the budget increase will often outstrip the general rate of home appreciation, so everyone's taxes go up every year.

It gets more complicated because you could have multiple entities assessing taxes - county, city, utility district, school district, etc.

Here's a specific example from Guilford, CT.
{edited to add link and more specific numbers}

These are good points, but there are even more complicating factors: the tax is on the appraised value, which often bears little to no relationship to the market value we try to figure out when we're looking at new worth. Some people fight the appraisals, with varying degrees of success which often depend on who you are (no bitterness here; I've successfully fought appraisals in two of the last three years). That means that everyone's property may appreciate at the same rate, but some will have more of an increase in taxes than others, even if the mils remain the same.

I guess the bold part is what I am used to... but I'm not in the US. Here in Ontario, from my cynical observations of municipal governments, they often just say "Hey, market's up! Tax revenue's high! Let's buy hookers and blow!" and when the bubble bursts the response is "Shit, there's not enough money for the hookers and blow fund! Better raise tax rates!" and it just ratchets from there. Since that's set by city, YMMV.

[Spork]

I guess the bold part is what I am used to... but I'm not in the US. Here in Ontario, from my cynical observations of municipal governments, they often just say "Hey, market's up! Tax revenue's high! Let's buy hookers and blow!" and when the bubble bursts the response is "Shit, there's not enough money for the hookers and blow fund! Better raise tax rates!" and it just ratchets from there. Since that's set by city, YMMV.

my (still cynical, but ever so slightly different) view: as values go up, they might, just might get assessed as Hamster describes.  When values go down, they seem really, really, REALLY slow to re-assess them down.   

Our local office can also be very difficult to get to follow their own rules.  It took me 5 years to get an agriculture exemption on my property -- even though every property around me has one and the previous owner that sold it to me has one.

We had similar issues with my MIL's property that suddenly got re-evaluated to a multi-million dollar piece of land from an original value of about $200k.  It's clearly ag (and used that way), right next to a flood plain (that stays flooded), has multiple utility right of ways (2 or more pipelines plus one high tension electric).   The county raised it because of a nearby piece of land that was hugely over valued.  Who owned that land?  The county.  And it was tax exempt, of course.

[Random]

I agree with all of the commenters that a paid off house, unless it is generating income, should not be included as part of your FIRE investment stash.

However, it should be noted as a really important asset, especially in your thinking for end of your run.  Think about reverse mortgages, sale, etc.  It is a nice ace in the hole to use if you need it.  If you don't need it, your heirs will be that much more appreciative.

[Bigote]

We're all born with a short position in housing.  You've covered your short, so you no longer have the expense that others do, but it isn't income. 

[MrsPete]

No, I do not consider my home an investment because it's not something I can liquidate.  Well, you know what I mean:  I can sell this house, but I'm going to have to turn around and put the money back into another house right away -- I have to live somewhere. 

It is an investment of sorts, and in some ways it's the best of all investments because it (hopefully) increases in value AND fulfills a practical need, but I'll never "get my money out" of the house.  My children will probably someday get the money out of my final house after I'm dead.