Do you count real estate equity in your net worth?

[russianswinga]

So as I get deeper and deeper into the Mustache rabbithole, I need to begin making my own spreadsheets (and using templates) to estimate FIRE dates and how changes in income / savings streams will impact them.

One of the numbers that's puzzled me is Net Worth.
How do YOU define it?

My parents, who are mustachian entirely on their own and "don't need some blogger to teach them what they already know", tell me that you're only worth your liquid assets.
They're very close to retirement (both in early 50's), and want to have a few extra hundred thousand $$ saved up before they finally pull the trigger.
Me: But what about your $1 million+ house that you raised our family in? You mentioned you will sell it and downsize significantly
Dad: Yes, but that's not "retirement" money. It's not a liquid asset so it doesn't count
Me: If you downsize to a house that's $500K, you will have an extra $500K to immediately add to your liquid assets. You also have 3 additional rental properties worth over $1M that are paid off, with steady rental income streams. Do you not count them as assets in your net worth?
Dad: Of course not. I count the income streams, but property never counts! And if you sell it so you can retire sooner, you're an idiot for losing an income stream - unless you were planning on doing it anyway, in which case you still aren't allowed to count the money as your net worth in your retirement calculation - it's just extra money!

So my parents, according to them, are worth about $500K, which is their liquid savings and investments, and they think they need a few hundred K more before they retire (they both get a university pension, too). In reality, they're worth about $2.5 M if you count the value of all their properties, and if they are planning on selling their primary house anyway when they retire to a smaller house, they should at least count the potential profit from that sale as part of their net worth, especially if it will let them retire more quickly.

By my parent's standard, the $50K of equity I have in my own condo doesn't count as my net worth.

What are your thoughts? Does equity count? Should I use it in my retirement calculations, or should I just stick to liquid assets?

[Gone Fishing]

I count it as part of my net worth (because I can sell it), but do not count it as part of my investable assets (which I use to determine my withdrawal rate).

[RoseRelish]

Definitely count real estate equity in your net worth calculation. It is an asset that could potentially produce income/growth. However, I'd exclude equity in your personal residence from any FIRE calculations, unless you plan to sell/downsize.

[nanu]

Definitely count real estate equity in your net worth calculation. It is an asset that could potentially produce income/growth. However, I'd exclude equity in your personal residence from any FIRE calculations, unless you plan to sell/downsize.

You could always get a reverse mortgage as well.
I think that real estate equity should be part of the calculation, whether it's your main residence or not.

[ysette9]

Your parents' line of thinking to me sounds like rubbish. ;) Of course your equity is part of your net worth! If your parents magically woke up tomorrow and did not own their house wouldn't they feel like they had lost something and were now poorer? As a poster above has already stated, they are not part of your investible assets, but they certainly are part of your net worth. That maybe the point of confusion there where your father is thinking "investible" and getting it confused with "net worth".

From dictionary.com: Net worth

noun
1.
net assets.

[RexualChocolate]

It's absolutely on your balance sheet. It's always in your net worth calculation no matter how you classify it. You could include only the equity portion, subtracting out transaction costs to liquidate if you want, but there's now way to not include it.

You can think about it two ways:

One, as a performing asset that pays (Expenses of Owning - Market Rent) as a dividend to get a return. Most house returns are negative until the mortgage has been amortized past 50% LTV. A fully owned house is sometimes still negative since people waste a lot of money remodeling and doing repairs.
Two, as a non performing asset that lowers your expenses by Market Rent.

How you do your Safe Withdrawal Rate depends on your house due to its net return (how much money it lets you not spend) on the expense side. However, if you chose 2, you can't include this on Performing Assets, so its value is basically meaningless outside of the rent it is saving you. This is what they're trying to get at, but their terminology is wrong.

[CestMoi]

I don't count my real estate in my new worth calculation, no. I consider its value a "wash", since I'm always going to have to pay to live somewhere. If I make extra money on the sale of my current residence, great, but I don't assume I will.

[russianswinga]

OK, so to simplify, using my own example.
Say I have a $250,000 house (just appraised) with $50,000 equity and $200K mortgage.
Say I have $50,000 cash in savings, investments, etc, combined.

By the simplified term of net worth (without counting performing or nonperforming assets since it's my primary and only residence), am I correct in calculating:

Net worth =
assets (50K cash + 50K equity = $100K)
MINUS liabilities (mortgage at $200K)
EQUALS -100K (negative 100K)  ?

[RexualChocolate]

No, Assets - Liabilities = Equity. Equity is not an asset.

Home equity is just the Value of house - liens against it (so mortgages and HELOCs/HELOANS/any other debt secured by the house).

Assets 50k cash, 250k House
Liabs Mortgage 200k.
=
Net worth(total equity) +100k

[russianswinga]

Well, I certainly like that calculation a lot more ;)