Author Topic: How do you count home value as an investment for figuring out your FIRE date?  (Read 7688 times)

Landlady

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How do Mustachians add property value and rental income to your FIRE timeline since a 4% withdrawal rate does not apply? Unfortunately you cannot sell a house 4% at a time!
I apologize if this topic is already being discussed. I'm new to the forum and the search function is not returning anything for me.

Clean Shaven

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I started a similar thread recently, on considerations in factoring in home value and anticipated future downsizing into calculations:

http://forum.mrmoneymustache.com/investor-alley/fire-planning-calculators-and-sale-(downsizing)-of-primary-residence/

tonysemail

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Hi, welcome to the forums.

The search function has never worked.
http://forum.mrmoneymustache.com/forum-information-faqs/the-forum-'search'-feature/

But you can use google to search the forum contents.

waltworks

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In fact, you can slowly sell your house. It might not be a great idea, but when you get older, you'll get bombarded with ads for reverse mortgages!

To answer the question: Your house is an expense. Not an investment. Discount it completely for the purposes of 4% rule calcs.

-Walt

Drifterrider

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In fact, you can slowly sell your house. It might not be a great idea, but when you get older, you'll get bombarded with ads for reverse mortgages!

To answer the question: Your house is an expense. Not an investment. Discount it completely for the purposes of 4% rule calcs.

-Walt

BINGO!!

bpleshek

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The only thing your home value(your home) does for you replace rent.  So if you sold your house, you'd have to pay rent.  That's the value of your home.  If you own it outright, then your annual expenses in the housing category should be your taxes and insurance plus any repairs/upgrades.  Therefore, I wouldn't count it at all for FIRE except that it reduces your expenses in the calculation.  Whether it's 100k or 1M in equity isn't relevant unless you're selling it.  But if you sell it, you gotta live elsewhere.  So just discount it.

Brian

mathjak107

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i just posted my opinion on this in another thread .

if a house cost less than renting  it cuts costs and improves existing cash flow . it is an expense .

if you rented a 3 bedroom apartment  when the family lived there and now rent a 1 bedroom without the kids you see the same drop in expenses and improved cash flow .

do not count any part of this as additional income . it is not . you are fooling yourself .

cutting expenses has a bottom after which increases in expenses can't be covered .

increases in income are in theory endless . you really need both .


Another Reader

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Some of the more detailed retirement income planners calculators allow asset sales and rental income to be included explicitly.  My approach is to make a conservative estimate of net rental income and subtract that from the total required income.  The same with pension and SS income.  Any remaining shortfall has to be covered by income from the paper portfolio. I do not include the value of my house because I do not intend to sell it.  I do include all the expenses of the house, including the mortgage and capital improvements, in my expenses.

FrugalFan

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Some of the more detailed retirement income planners calculators allow asset sales and rental income to be included explicitly.  My approach is to make a conservative estimate of net rental income and subtract that from the total required income.  The same with pension and SS income.  Any remaining shortfall has to be covered by income from the paper portfolio. I do not include the value of my house because I do not intend to sell it.  I do include all the expenses of the house, including the mortgage and capital improvements, in my expenses.

+1   Count net rental income as income (minus savings for repairs, vacancies, etc), and subtract that from how much you need to make from your investments. Your primary residence equity shouldn't count unless you plan to sell it.

Ozlady

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Your own home is NEVER an asset ..just a Liability..Period.

Case in point:
A friend of mine likes to boast she bought a period, turn of the century home (cost 1.7 million 5 years ago)..she points out many times that was a Street Record...comes with a big mortgage...

5 years later, her hubby lost his job...hard to swallow if they want to downsize .. oops what will others THINK?!

Hard to rent as it is So Nice! Tenants will definitely not take so much care (think professional gardener., landscaped gardens...professional upkeep of pool ... )

Caught in a very tight spot!  do you think it is an asset ? i think it is a noose around the neck. I'll rather split the money and buy a modest home, low mortgage and use extra monies to invest...


PFHC

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I just include the anticipated sale price as cash to be used when I reach ER. My parents sold their house and moved into a small apartment close to the beach when they retired and it worked beautifully.

Ensign1999

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How I treat my house depends on what my plans are:
-A house is a liability so long as you live in it.  You never know what expense might come up to keep the house going.  Even if you own the house you still need to pay tax and insurance on it.
-If you plan on staying in your house after FI, then it doesn't count for anything and you need to account for the T&I in addition to any mortgage in your calculations.
-If you plan on selling it and moving to either a rental that has rent less than T&I or to a house that costs less, then you can count the equity/cost difference.

For example, if you own a house worth 150k (no mortgage) and you plan to move to a 100k house after FI, then you could count the some of that 50k in equity (minus sale costs etc.)  If you plan on staying in that house forever, then it doesn't count for anything.

GuitarStv

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To answer the question: Your house is an expense. Not an investment. Discount it completely for the purposes of 4% rule calcs.

I completely agree that while you live in a house it is an expense, but think that saying housing is not an investment is overly simplistic.

A house is an investment, it's just not a very liquid one.  It is certainly not a risk free investment.

If your home doubles in value over 15 years while you live there, you sell it and then buy a cheaper home in a different location of the country you will realize large gains from your investment.  If your home value plummets and the neighbourhood around you becomes dangerous (I'm lookin' at you Detroit), then you will probably have to move and will realize a large loss from your investment.

mathjak107

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it can be an investment once you stop consuming it and sell it.

GuitarStv

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it can be an investment once you stop consuming it and sell it.

The exact same argument can be made for stocks.  They're only an investment when you stop holding them and sell.

mathjak107

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no , not true . investments for basing an income on need to be ready to be easily liquidated  when the moment arises . you can refill cash , or bond buckets from equity's at a push of a button .

you can't sell the living room if you are still consuming the house .

you can count the house as part of a net worth , but throwing things in the mix for calculating a draw rate  that may not be sale-able  yet is not a great idea .

a home you want to sell down the road should be treated the same way i calculate for social security which i am delaying to 70 . .

the draw stands at 3.50% as of now while i delay ss . at the point in time ss kicks in it drops to 2% .  we also own two co-ops which we hope to sell one day but right now can't because we have rent stabilized tenants who will not take a buy out .

once they are sold we will then recalculate  the income stream but until that point the income stream is only based on what is liquid .
« Last Edit: August 12, 2016, 01:07:15 PM by mathjak107 »

GuitarStv

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no , not true . investments for basing an income on need to be ready to be easily liquidated  when the moment arises . you can refill cash , or bond buckets from equity's at a push of a button .

you can't sell the living room if you are still consuming the house .

you can count the house as part of a net worth , but throwing things in the mix for calculating a draw rate  that may not be salable  yet is not a great idea .

Yeah, that's why I said above that a home isn't very liquid, and that I wouldn't count the money in it as an investment while you're living in the home (Although you can get a reverse mortgage or home equity loan if you need to draw money from your home without selling it).

But the argument that a home can't be counted as an investment because you only get money when you sell it is silly.  Your stocks only yield money when you sell them (yes, excepting dividend funds).

mathjak107

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for most american's a home is the best thing they can buy . most ' are awful at investing as well as lack the discipline . at the end ,  the home is all they usually end up with as far as investments . it may not be the best choice for an investment but it makes a great 2nd place prize .

mathjak107

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no , not true . investments for basing an income on need to be ready to be easily liquidated  when the moment arises . you can refill cash , or bond buckets from equity's at a push of a button .

you can't sell the living room if you are still consuming the house .

you can count the house as part of a net worth , but throwing things in the mix for calculating a draw rate  that may not be salable  yet is not a great idea .

Yeah, that's why I said above that a home isn't very liquid, and that I wouldn't count the money in it as an investment while you're living in the home (Although you can get a reverse mortgage or home equity loan if you need to draw money from your home without selling it).

But the argument that a home can't be counted as an investment because you only get money when you sell it is silly.  Your stocks only yield money when you sell them (yes, excepting dividend funds).

a reverse mortgage is a loan , it is just like any other loan . the only difference is you sign paper work agreeing to let them take the house if you do not pay back the loan instead of having to foreclose . .

you don't even need a house to take loans . the only reason to use it as collateral is you get a better interest rate .
« Last Edit: August 12, 2016, 01:11:12 PM by mathjak107 »

GuitarStv

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no , not true . investments for basing an income on need to be ready to be easily liquidated  when the moment arises . you can refill cash , or bond buckets from equity's at a push of a button .

you can't sell the living room if you are still consuming the house .

you can count the house as part of a net worth , but throwing things in the mix for calculating a draw rate  that may not be salable  yet is not a great idea .

Yeah, that's why I said above that a home isn't very liquid, and that I wouldn't count the money in it as an investment while you're living in the home (Although you can get a reverse mortgage or home equity loan if you need to draw money from your home without selling it).

But the argument that a home can't be counted as an investment because you only get money when you sell it is silly.  Your stocks only yield money when you sell them (yes, excepting dividend funds).

a reverse mortgage is a loan , it is just like any other loan . the only difference is you sign paper work agreeing to let them take the house if you do not pay back the loan in stead of having to foreclose . .

Yep.

I only mentioned it as a loan option available for you if you need money immediately so that you can take the month or two to get your home investment ready for sale.

mathjak107

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we are pretty careful of what we count in our income stream . we also realize that a safe withdrawal rate can spend principal to zero the year after you calculated and you can have 100% success rates .

so we keep a seperate emergency fund as well as extra money out of the income generation pile .  as time goes on and we are sure we are not going to be a worst case scenario we can reduce that and add it back in to the pile .


Enigma

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I do not count or consider my primary home as part of my investment when figuring out my FIRE date.  I do however count my residual income from other rental properties.  IMO it would be easier for a renter to FIRE because they do not have to do as much upkeep, taxes, insurance, mortgage (P&I), repairs, etc....

NoNonsenseLandlord

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I only counted cash flow.  I made sure the rental income, after expenses, was well over what I needed.  Like 3-4x what my actual spend was.  I included 7% for management, 10% of rents for maintenance, and 5% for vacancy.  My actual rental expenses were less, but I made sure of the cushion.

My budget did not include rent, as i had no mortgage.

clarkfan1979

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Re: How do you count home value as an investment for figuring out your FIRE date?
« Reply #23 on: September 05, 2016, 09:55:42 PM »
The only thing your home value(your home) does for you replace rent.  So if you sold your house, you'd have to pay rent.  That's the value of your home.  If you own it outright, then your annual expenses in the housing category should be your taxes and insurance plus any repairs/upgrades.  Therefore, I wouldn't count it at all for FIRE except that it reduces your expenses in the calculation.  Whether it's 100k or 1M in equity isn't relevant unless you're selling it.  But if you sell it, you gotta live elsewhere.  So just discount it.

Brian

I agree with the comments above. Do not count the value of your house, unless you plan on selling and downsizing. Do count how much a "paid off" house is off-setting any potential rent. Let's say you have no mortgage but taxes and insurance total $400/month. If renting a similar house was $1400/month in the neighborhood. You would then need $1,000/month less of passive income to FIRE or $12,000/month less. This is why MMM can live on $24,000/year. If his house was not paid off, he claims he would need $36,000-$40,000 of annual income. 

mathjak107

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Re: How do you count home value as an investment for figuring out your FIRE date?
« Reply #24 on: September 06, 2016, 02:25:01 AM »
a paid off house may cut expenses and improve cash flow . but that house is always an expense . you never count it as more income . it is the same as cutting any expense .

it is no different than a renter downsizing from a 3 bedroom apartment to a one bedroom once the kids are out . it is the same improvement in cash flow .


Spitfire

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Re: How do you count home value as an investment for figuring out your FIRE date?
« Reply #25 on: September 06, 2016, 11:54:18 AM »
I just include the anticipated sale price as cash to be used when I reach ER. My parents sold their house and moved into a small apartment close to the beach when they retired and it worked beautifully.

This is a good way to do it if you plan to sell the home. Count your equity as investable cash.

If you plan to hold and rent it, treat the net cash flow after taking all expenses into account as income, then apply the 4% rule to any stock market investments.

 

runewell

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Your own home is NEVER an asset ..just a Liability..Period.

Not a fan of this definition.  A home is an asset, a mortgage is a liability. 

Determining own vs rent is complicated:

1) Renting makes moving easy, owning is great for stability.
2) Renting requires cash flow forever which is potentially subject to inflation; completely-owned homes are a hedge against inflation.
3) Houses can see some appreciation over time, but renters don't end up with a lot of principal tied up in a house.  A lower rent payment can free up funds to invest.
4) Owning requires upkeep but also gives you freedom, renting comes with mainenance but the place isn't yours.

I think that it simplifies the calculations to leave the house out of the net worth calculation for the purposes of retirement calculations.  Expenses like insurance, taxes, and upkeep remain.  However I could sell my $250K house and use the money to pay rent on a decent apartment for 10+ years if I really wanted to access the money tied up in the house...  So I think it makes to know both numbers, net worth including and excluding the house (and cars).

DailyGrindFree

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Your own home is NEVER an asset ..just a Liability..Period.

Not a fan of this definition.  A home is an asset, a mortgage is a liability. 

Determining own vs rent is complicated:

1) Renting makes moving easy, owning is great for stability.
2) Renting requires cash flow forever which is potentially subject to inflation; completely-owned homes are a hedge against inflation.
3) Houses can see some appreciation over time, but renters don't end up with a lot of principal tied up in a house.  A lower rent payment can free up funds to invest.
4) Owning requires upkeep but also gives you freedom, renting comes with mainenance but the place isn't yours.

I think that it simplifies the calculations to leave the house out of the net worth calculation for the purposes of retirement calculations.  Expenses like insurance, taxes, and upkeep remain.  However I could sell my $250K house and use the money to pay rent on a decent apartment for 10+ years if I really wanted to access the money tied up in the house...  So I think it makes to know both numbers, net worth including and excluding the house (and cars).

I completely agree with the last sentence. It is better to know and track both numbers.
It all depends on what you would like to do when you retire. I currently own a house and would like to sell in order to either downsize or rent. Once I am FI, I am planning on not owning a house and be a NOMAD for as long as possible. 

Mola

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You can monetize the equity in your home. Take out a HELOC at some rate and then use that money to earn money at a higher rate; the arbitrage is a form of income. For example, a 5% HELOC which you then do hard money lending with at 12%. Of course there are risks to it so probably not something to do unless you have enough experience in whatever your use of the money is so you can accurately account for your credit risk and interest rate risk. Last thing you want to do is lose your house to earn a couple of bucks. But, the point is there are ways to monetize that equity.

Guide2003

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1) Renting makes moving easy, owning is great for stability.
2) Renting requires cash flow forever which is potentially subject to inflation; completely-owned homes are a hedge against inflation.
3) Houses can see some appreciation over time, but renters don't end up with a lot of principal tied up in a house.  A lower rent payment can free up funds to invest.
4) Owning requires upkeep but also gives you freedom, renting comes with mainenance but the place isn't yours.

2) isn't a mortgage a better hedge against inflation than a paid-off house?
3) theoretically couldn't the money a renter doesn't put into a down payment be appreciating at a greater rate in the market?

I think buy vs rent is discussed better in other threads, but for the purposes of this question I would only count home values in the net worth calculation if the plan is to sell the house, whether to buy elsewhere or start renting. Or live out of a van.

MiserlyMiser

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Apologies if this is obvious and I'm just being dense, but how do you count your *mortgage* for purposes of figuring out your FIRE budget?

I have about $200k left on my mortgage, and my monthly payments are roughly the same as they would be if I were renting.  Assuming I have $1 million invested (not my real number), then as a renter without a mortgage, the 4% rule gives me $40k/year, but as a homeowner, subtracting my mortgage (without adding the equity value) gives me a NW of $800k, and the 4% rule then gives me only $32k/year.  Under both scenarios, my income producing assets and my monthly expenses are (roughly) the same.  Do I plan for a retirement of $40k/year, or $32k/year? 

neo von retorch

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Apologies if this is obvious and I'm just being dense, but how do you count your *mortgage* for purposes of figuring out your FIRE budget?

I have about $200k left on my mortgage, and my monthly payments are roughly the same as they would be if I were renting.  Assuming I have $1 million invested (not my real number), then as a renter without a mortgage, the 4% rule gives me $40k/year, but as a homeowner, subtracting my mortgage (without adding the equity value) gives me a NW of $800k, and the 4% rule then gives me only $32k/year.  Under both scenarios, my income producing assets and my monthly expenses are (roughly) the same.  Do I plan for a retirement of $40k/year, or $32k/year?

The way I do it is to omit the mortgage (P+I) from my expenses / nest egg calculations, and then add the sum of the leftover mortgage (when you RE) back in. Your investment return should be higher than your mortgage rate, so the nest egg portion that equals the mortgage remaining (at the point of retirement) should be enough to pay your mortgage payment (though you could also opt to just pay it off exactly at that point.) Your taxes/insurance will stick around whether you have a mortgage or not, so you should include them in expenses.

In your example, while you have $1 million invested in both cases, your net worth (excluding equity) is $200k lower in the example with a mortgage. And as long as are living in the house, the equity isn't useful for paying bills. Of course, depending on where you live, your expenses with rent would be higher or lower than what they'd be with a mortgage, so it's not directly comparable.

In your example, assuming you keep the house/mortgage, you plan for a retirement of $32k/year (not including mortgage P+I).

ETA: I think the confusion in your example is "expenses are roughly the same" - but one of those includes rent while the other includes mortgage. Let's just say both your rent and your mortgage are $8k/year. Now you have $32k/year left for all the rest of your expenses, whether you rent or own.
« Last Edit: March 29, 2017, 11:29:27 AM by neo von retorch »

FernFree

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I count the equity minus a healthy chunk for closing costs and upgrades/repairs needed to sell it.  I do, however, plan to move within 5-10 years of FIRE and either sell it or rent it out.  This equity is also a relatively low % of my overall stache.

On the other side, I count my mortgage, taxes, insurance as expenses and they are at about the same level as if I moved to a lower COL area because my mortgage payments are very low (~$1K/Month total)

You can run different scenarios on FireCalc and make sure you are OK with all of them. 
1. Just count the equity as part of your stache
2. Exclude it and add in a lump sum of cash in X years once you sell it (try different years to see how your success % changes)
3. Exclude it and add $Y annual income from renting it starting in X years

If you want to totally exclude it and just keep working more years, knock yourself out. :)