Any rule of thumb re value of own home?

[happy]

Inspired by another thread, I'm off researching asset allocation and trying to figure out what I'm aiming at.

I understand that whilst the value (or equity if there is still a mortgage) of ones own home can count towards net worth, it generally isn't included in asset allocation. And as such it doesn't seem discussed much unless I'm looking in the wrong places.

Is there any rule of thumb regarding what proportion of net worth "should" one's home (equity) be?  I have seen 40-45% of total net worth on a website.

What sayeth the mustachians?  (Comments from Aussies used to our high real estate prices particularly welcome.)

[bigchrisb]

My view is that my "home" should have the lowest operating cost that I'm prepared to live with.  I don't actually care if that is made up of  rent, interest, imputed rent of the opportunity cost of capital, or other outgoings such as land tax, HOA dues or rates.  I guess I view the cost of housing very much on the "consumption" side of my cash flow, rather than the "asset" side of my balance sheet.

As for what proportion of net worth should be property per-se, well that's an asset allocation question.  My personal view is 10-15% of net worth, between principal place of residence, investment residential property or commercial property/REITS. However I realise that for many, this is a mismatch against the aspirations people have for their home.



 

[happy]

Hah!:) I nearly put in brackets in my post "other than as small as possible!"

My personal view is 10-15% of net worth, between principal place of residence, investment residential property or commercial property/REITS. However I realise that for many, this is a mismatch against the aspirations people have for their home.

Yes it is for me, but its a good answer and has allowed you to create a good stash.  At some point I need to downsize my PPR, which will give me more assets to allocate! The timing of the downsizing is another question, but not the one I'm asking right now. (Alternatively I can just keep working and stashin' for longer..... :( ).

[arebelspy]

Is there any rule of thumb regarding what proportion of net worth "should" one's home (equity) be?  I have seen 40-45% of total net worth on a website.

What sayeth the mustachians?  (Comments from Aussies used to our high real estate prices particularly welcome.)

Completely irrelevant, no matter where you live or what the real estate prices are.

Buy the size home you need.  Develop a stache that can cover your expenses at a SWR you're comfortable with (2-4%, typically).  That could include owning the home free and clear, so you need a smaller portfolio since your expenses are less, or it could include having a mortgage, and a larger portfolio to cover that extra expense (typically one would reach FI faster in the latter scenario, with today's low interest rates).

Whatever that home happens to be as a percent of your total net worth is completely irrelevant.

In some cases that home will be a huge percent, because you decided to live in Australia, Toronto, Washington DC, whatever.  In some it will be small, due to choosing to live out in the sticks.  Other times it will be somewhere in between.  But setting a rule of thumb like 20%! or 40%! is silly, and meaningless. 

It depends on where you want to live, and even then will depend on the size home you need.

Get the correct size home for you, build a large stache.  Percent that home is of your net worth?  Irrelevant.  It's fairly simple.

(Sorry if that isn't quite what you were looking for when you started the thread, but I think if you reflect on it you'll gain a lot more insight than some random percent number.)

[Mr Mark]

Great insight AREBELSPY. Made me stop and think. "Completely irrelevant"... Hmmm. That might apply post-FIRE, but during accumulation? Fully agree, btw, the house you live in is on the consumption side of the balance sheet!

The % equity in real estate as a function of total stash in general though is a consideration for portfolio rate of return. Tax. Volatility. Exposure.

 And so having all your net worth in real estate with leverage in Las Vegas (say) in 2006 was definitely not an irrelevant investment strategy.

[aj_yooper]

Yes, bigchrisb!  "My view is that my "home" should have the lowest operating cost that I'm prepared to live with.  I don't actually care if that is made up of  rent, interest, imputed rent of the opportunity cost of capital, or other outgoings such as land tax, HOA dues or rates.  I guess I view the cost of housing very much on the "consumption" side of my cash flow, rather than the "asset" side of my balance sheet.

As for what proportion of net worth should be property per-se, well that's an asset allocation question.  My personal view is 10-15% of net worth, between principal place of residence, investment residential property or commercial property/REITS. However I realise that for many, this is a mismatch against the aspirations people have for their home." 

Great comment!

A residence/property with a mortgage is a leveraged investment which may have significant upside and downside potential that legally requires consistent input of cash- principal, interest, taxes, HOAs, insurance, fees, and maintenance.  In the US real estate is bundled with education and other local services. Because a mortgage is a leveraged instrument, risks and benefits are magnified.  A 40% decline in home value, means, at least, a doubling of loss at liquidation, assuming an 80% loan, and conversely.  For me, this suggests a lower asset allocation to real estate if it is leveraged. 

[Tyler]

Lesson from the housing bubble: If your mortgage is more than your savings and your house depreciates sharply, you run the risk of becoming financially anchored to the home and unable to move or refinance for many years (and potentially ruined if you used an ARM that doesn't allow you to wait out the dip).  So while the percentage doesn't really matter from a withdrawal rate perspective (because your house is NOT part of your investments in that calculation) I still wouldn't recommend using large amounts of mortgage leverage just from a risk mitigation perspective. 

[happy]

Thankyou for all your replies which I have been thinking about.

Firstly I agree that ones home is not part of one's investment and therefore irrelevant when considering asset allocation. I also agree that there is not likely to be an "One Size Fits All" answer to home value other than "as little as you can happily manage".

I agree that if you are planning FI prospectively, then

Get the correct size home for you, build a large stache.

However at 54, I am really "retro-fitting" a plan and have identified a pocket of capital that is currently inaccessible due to buying too much house. 

So whilst in one sense I agree that "its irrelevant" if you are planning prospectively, for me, my time to retirement is considerably influenced by how much I downsize my house. I'm not as Badass as Bigchrisb, thats for sure, but am wondering what decisions other mustachians have made about how much to spend on their house.

I probably should have phrased the thread question differently: its not OSFA, but  the value of the house  diverts money from the stache.  I was just trying to get a sense of what proportion people might think  is appropriate and what is too high.
 
So disregarding the mortgage, should the house value be 10% of the stash size, or 25% or 50% or 70%? I'm suspecting most mustachians would say a house value 70%  of the stash size sounds too high ( say house 350k, stash 500k). And if you double it house: 700k and stash 1M? And a 1:1 ratio too much i.e. 1M house and 1M stash or 300k:300K.

 And whilst we might be happy living where the median house price is 250k or 350k, when we start talking about a house worth 1M no matter where it is I think "non-Mustachian". Yet 1M stash is not ERE territory but not out of court for some Mustachians.

After hashing this around for a while I agree  there is just too much individual variation in personal circumstance to come up with anything useful in terms of a rule of thumb. (ARS right again). Nevertheless I'd still love to hear how others have made this decision and what sort of figures/proportions they have decided on.

[arebelspy]

However at 54, I am really "retro-fitting" a plan and have identified a pocket of capital that is currently inaccessible due to buying too much house. 

Even in this situation, I would still posit that you should downsize to the correct size house for you, then work on your stache to get an appropriately low SWR.  Calculating the percent that your house happens to be, afterward, might be interesting to you, but I wouldn't use some percent number to decide what size house to get.

Using a random percent could lead you to getting one much too large, or much too small.  Go the goldilocks route and get one that's just right.  ;)

[Mr Mark]

As we've all said, first question is what house do you need? And remember, the house you live in is consumption expenditure.

Then,  work out how much to rent that house, including all fees and taxes. That's your cashflow baseline. Using your swr and tax info, how much stash is needed to fund the rent?

Then the question is, can I get the same house for less by using that stash to buy it and pay all associated costs and taxes, using the same swr? And what's the best deal wrt 100% equity vs varying mortgage %?  Typically, at least in US,  portfolio returns are probably maximised by having only enough equity to avoid a PMI charge, as the long term market return should be bigger than your mortgage, and rates are generally lower than 4%, a typical swr.

[kyleaaa]

As low as possible. Your personal residence doesn't throw off cash flow and you can't spend the equity unless you borrow against it. Rental real estate is a different beast, and anywhere from 0-50% would seem reasonable to me.

[aclarridge]

If you are looking for a rule of thumb, one I've heard is that it should be no more than (90-your age)% of your net worth. So if you're 30, it should be no more than 60% of your net worth. I guess this is to prevent people from going out and putting 10k down on a 500k house with no other assets, like so many do in my country. I haven't thought much about how well this meshes with ER, but anything that discourages doing the 10k down on a 500k place with no other assets (common in my country) sounds like good advice for the majority to me.
It's crazy to me that the majority choose ultra risk-averse GIC/CD/savings account investments, yet leverage up 80-95% to buy their house with little to no other assets.