Author Topic: Home Equity - do you include it in your stache?  (Read 2280 times)

FernFree

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Home Equity - do you include it in your stache?
« on: July 08, 2016, 01:57:45 PM »
Hi, all.  Working on my FIRE plans and I can't decide what to do with my home equity.  I have been leaving it out of my stache number, but after thinking about it some more I think I should include it and it would take my FIRE date from about 5 years to about 2!!!!  :)

Details:
House Value:  ~$220K
Mortgage:  $63K
Equity:  $157K

Logic:
1.  If I rent out the house to travel (an option I am considering after FIRE), the difference between the rent I could collect and the mortgage/tax/maintenance would almost be = 4% SWR. (net rental income = $5K vs. 4% SWR on equity = $6.2K)
2.  The home is in a great area with steadily increasing home values, great employers in the area (Google, Apple, Dell, etc.), so high probability that home's value will increase >4% each year.
3.  I could sell the house at anytime after FIRE, and the equity would go directly into my stache, so why not count it from the beginning?

Appreciate your thoughts and whether or not you include home equity in your calculations.  I've jumped on the bandwagon that a house is not an asset, but a liability, so have been leaving it out but really want to include it and shave off 3 years!


Choices

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Re: Home Equity - do you include it in your stache?
« Reply #1 on: July 08, 2016, 02:35:43 PM »
In response to your #3, it's okay to include if you also include rent in your post-FIRE budget.

Jim2001

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Re: Home Equity - do you include it in your stache?
« Reply #2 on: July 08, 2016, 02:55:30 PM »
In response to your #3, it's okay to include if you also include rent in your post-FIRE budget.

Well put. 

You've got to have someplace to live post FIRE.  Likewise, transportation is also a need post FIRE, but I think most people leave regular replacement of a vehicle out of their budgets (it can be amortized before or after purchase).  Instead they look at the budget and say "yeah, I made the last payment".  But at some point the vehicle will wear out and need to be replaced. 

Thoughts?

Shor

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Re: Home Equity - do you include it in your stache?
« Reply #3 on: July 08, 2016, 03:06:24 PM »
1 is you keep the house and rent it out. You get some gain in rental income, some expenses in usage. Actual purchase price of the house does not matter. Cash flow is the important indicator here. Also, while you rent it out, you either still live there, or live somewhere else (additional expense).
2 is you keep the house, for which it retains a dubious value. You'd LIKE it to be what you paid for, but it's not. The value is what you can end up selling it for. A good indicator is nearby, similar count houses, which gives you an idea of what the house might be worth to a seller. Until it's sold, the equity, the amount you bought it for, is actually a useless number.
If you paid $100 for your house 80 years ago, would it only be adding 100 to your networth? It provides a savings for you by not charging rent, and that rent number not showing up on your expenses on a monthly basis is what the house is providing you.
3 is you plan to sell the house. This involves closing costs, getting a seller, agreeing on a number.  and then... you need to live somewhere. By which you will need to either pay rent, or again buy a home, for which the value is just some amount that you pay for, and not an actual useful value to add to your networth.

The house accelerates savings by removing rent (which is usually the largest expense in the spreadsheet), and provides a great means of leveraging your future earnings, and gives you some good exposure to RE value.
It's original purchase value does not go in to the equation, the expected sell value can, but then you need to account that you still are living somewhere.
Each scenario has its own expenses and income, so each target FIRE amount will differ.

In response to your #3, it's okay to include if you also include rent in your post-FIRE budget.

Well put. 

You've got to have someplace to live post FIRE.  Likewise, transportation is also a need post FIRE, but I think most people leave regular replacement of a vehicle out of their budgets (it can be amortized before or after purchase).  Instead they look at the budget and say "yeah, I made the last payment".  But at some point the vehicle will wear out and need to be replaced. 

Thoughts?
Vehicles are a pretty big luxury in retirement. Mostly they are a money sink that will only see sparse usage. Definitely most households can go down to 0-1 vehicles in retirement and make things work out with some lifestyle adjustment. Work usually requires a vehicle to get to, but has limited uses once the income is no longer needed. If a vehicle is the tipping point that makes or breaks success, then a person might be FIREing too close to the lower limit to be safe, not to say it can't work out, but that there are probably a lot more hidden risks they are failing to account for.

trashmanz

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Re: Home Equity - do you include it in your stache?
« Reply #4 on: July 08, 2016, 03:36:22 PM »
Do all the mental gymnastics you want but you do have to live somewhere. If it's not your house then that is fine just plan accordingly in your budget for where you will be living.

HappyHoya

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Re: Home Equity - do you include it in your stache?
« Reply #5 on: July 08, 2016, 04:01:47 PM »
I include it, although I'm not yet near enough to FIRE that whether or not I count the house changes things dramatically. I calculate my homes value in my net worth using the total amount of equity in the home, minus expected costs to sell. It's both a bonus in terms of adding some to my net worth and a limiting factor for house expenses, as I've been very careful to make sure my home doesn't become a money pit by only using the money saved from owning instead of renting to make any optional improvements.

PFHC

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Re: Home Equity - do you include it in your stache?
« Reply #6 on: July 08, 2016, 04:28:48 PM »
I include it because I plan to sell it in retirement. I use a conservative estimate.

Cassie

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Re: Home Equity - do you include it in your stache?
« Reply #7 on: July 08, 2016, 05:09:28 PM »
As others pointed out you can if you plan to either sell or pay rent and then figure that amount into your budget.

FernFree

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Re: Home Equity - do you include it in your stache?
« Reply #8 on: July 08, 2016, 05:41:21 PM »
Thanks everyone for your feedback.  I think I'll count it, but I like the suggestion to subtract out closing costs, etc.  I just checked Zillow and the valuation is much higher than I thought -- think I'll go with the tax assessors number and just update it annually.  I will also subtract from the equity number around $10K for improvements that I would have to do to get it into sell condition.

On the other side of the sheet, I'm already including in my expenses the mortgage, tax, maintenance, insurance, etc. (about $1K/month) and they are about equal to what I would pay to rent an apartment, so in the short-term, whether I stay, sell, or move and rent it out -- no real difference on the expenses side (I'm not including rental income to be more conservative).

I just re-ran all of my numbers in fireCalc, and with 4.5% withdrawal rate it looks like I can retire in about 2 years with 97% success.  Good enough for me.  :)  I'm so excited, I can't hardly drag myself to work anymore.

PFHC

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Re: Home Equity - do you include it in your stache?
« Reply #9 on: July 08, 2016, 08:08:39 PM »
I just re-ran all of my numbers in fireCalc, and with 4.5% withdrawal rate it looks like I can retire in about 2 years with 97% success.  Good enough for me.  :)  I'm so excited, I can't hardly drag myself to work anymore.
Very, very cool. I plan to do the same when I reach your age. Psyched for you!