Author Topic: Primary residence as a percentage of networth  (Read 1445 times)

moneytaichi

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Primary residence as a percentage of networth
« on: October 09, 2021, 10:11:19 PM »
The following article below has an interesting perspective on the values of primary residence as a percentage of networth. It's surprising for me to learn that the typical American has over 70% of their net worth in their primary residence. I am struggling on this issue as we are contemplating to buy a house in Southern Cali (high cost of living). Even thought I think we can afford a certain price, but I don't know where to draw the line in the sand, given very high real estate prices in our areas.

Whether your houses are bought with cash or loans, how do you decide how big house prices you can "afford"?  Do you have buyer's remorse on over- or under-buying it? Thank you for your sharing!

https://www.financialsamurai.com/primary-residence-value-as-a-percentage-of-net-worth-guide/
"In my opinion, the ideal primary residence value as a percentage of net worth is no more than 30%."
« Last Edit: October 09, 2021, 10:14:43 PM by moneytaichi »

habanero

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Re: Primary residence as a percentage of networth
« Reply #1 on: October 10, 2021, 01:02:56 AM »
It's a luxury most people don't have and if you want to own your own residence it's likely to make up a very large part of your NW for quite some time, maybe forever.

I used to want a bigger house, now I want a smaller one. The one we own is nothing extravagant and fine as long as we have two kids living at home, but we are very likely to downsize quite a bit when they eventually move out. This is to reduce maintanence/running costs, we won't need all the space anyway and also to get out some of the significant equity we currently have in our house.

When your total NW is high enogh that you can actuallly get a home that is 20, 30, 40 or 50% of your total NW you can make a judgement on it, but until then the decision is really to buy or to rent. Based on my experience most folks look at rent/vs buy in terms of monthly cashflow, if you buy you partly pay the money to yourself via the installments on the mortgage and we -like a lot of places it seems - also have a national obsession where the overall idea is that house prices cannot go down and are pretty much guaranteed to go up. Admittingly, that has been the case for about 40 years so it's kind of hard to blame people for getting that idea. My self 10 years ago when we bought didn't pay too much attention to the operating costs of a home, something Im more aware of now. Reduced energy usage, lower insurance, lower property tax, lower municipial fees and less to maintain will make siginficant impact on cashflow. Mortgage costs are a bit funky now with negative real interest rates, but that might not last forever.

Im currently at around 50%.In 10 years? Pobably 20-25% or so due to downsizing and rest of the 'stash most likely significantly larger than today.

MudPuppy

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Re: Primary residence as a percentage of networth
« Reply #2 on: October 10, 2021, 08:14:18 AM »
Iím around 60% of my NW in my house. Of course, if I take away my houseís estimated value AND the mortgage from my NW the picture is rosier. The area I live in is having a bit of real estate bubble, so Iím not worried about it. I donít include my house in my % FI calculation since Iíll still want to live in it when Iím FIREd.

Malcat

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Re: Primary residence as a percentage of networth
« Reply #3 on: October 10, 2021, 08:17:16 AM »
What kind of answers are you looking for?

It sounds like you feel intimidated by the cost of housing where you live and are maybe looking for reassurance from other people who have come to grips with having to spend so much on housing?

I know a lot of people who have spent a ton on housing due to living in VHCOL areas, some of them are okay with it and some aren't. Some shrug it off as the cost of living where they do and others angst over it and fantasize about moving somewhere cheaper.

I live somewhere that is becoming quite expensive, but DH have chosen minimalism and to live in a small apartment in a high-rise, so our home will never be much of our NW. By the time we're both retired, it might make up 20% of our NW, maybe, depending on how the housing market behaves.

Like pp, we also used to want a bigger house, but as we increasingly embraced minimalism, we went radically in the other direction because it made us happier. We love our home.

If we wanted a big, detached home, we just wouldn't buy here. But that's easy for us to say, because we both prioritized geographically flexible careers so that we would never be tethered to a given location. Especially me, geographic flexibility was the main driving force behind my career choice.

It's a matter of balancing priorities. If living in a VHCOL location AND owning a sizeable home are both top, top, top priorities for you, then you are going to have to get comfortable with the financial trade offs.

If financial comfort is more of a priority, then you will have to give on either house, or location, or both.

Life is a series of trade offs, only you can know which trades are worth it for you.

waltworks

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Re: Primary residence as a percentage of networth
« Reply #4 on: October 10, 2021, 08:52:42 AM »
Ours was maybe 40% (I'm talking total equity vs liquid net worth here) pre-Covid.

Now it's more like 75%, because our already very expensive house more than doubled in value.

Do I like this situation? Not really, but since our mortgage payment is the same either way and we don't plan to move, I don't spend any time worrying about it.

If I was going to buy a new place, I think I'd have a hard time tying up more than 30-40%.

-W

RWD

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Re: Primary residence as a percentage of networth
« Reply #5 on: October 10, 2021, 09:02:29 AM »
Our house is worth about 25% of our net worth. The equity is around 10%. We deliberately spent much less than we could afford.

Fishindude

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Re: Primary residence as a percentage of networth
« Reply #6 on: October 10, 2021, 10:08:02 AM »
We live on a large acreage in LCOL area.
The home itself and outbuildings on a couple acres would well under 10% of NW.

PMJL34

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Re: Primary residence as a percentage of networth
« Reply #7 on: October 10, 2021, 11:08:33 AM »
OP,

Financial samurai is a click bait website/blog. He is beyond FATfire and recommends shit like 0% withdrawal rate with 10m before you can retire. Don't pay him no mind.

House price as a percentage of your networth is entirely dependent on where you live. If you live in a VHCOL and choose to buy a home, you will inevitably have a lot of networth tied to your home. There is no way around it. It is what it is.

Like Malcat said, what is your real question/worry? Our guess is that you are most likely worried about buying something so expensive. The answer to this will require a case study of your finances and your life/FIRE goals.

Best of luck.         

dandarc

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Re: Primary residence as a percentage of networth
« Reply #8 on: October 10, 2021, 11:31:58 AM »
A very important FIRE lesson - stop reading anything from financial samurai / sam dugan (I think - no way gonna spend even a moment looking up this guy's name). "Analysis" from this source is so deeply flawed articles have been pulled from more reputable FIRE sites in the recent past.

Malcat

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Re: Primary residence as a percentage of networth
« Reply #9 on: October 10, 2021, 12:13:05 PM »
A very important FIRE lesson - stop reading anything from financial samurai / sam dugan (I think - no way gonna spend even a moment looking up this guy's name). "Analysis" from this source is so deeply flawed articles have been pulled from more reputable FIRE sites in the recent past.

I literally didn't even notice that it was a Financial Samurai article linked.

Yeah, that guy is a click-bait douchebag supreme, who sold out ALL of his credibility ages ago when he freely admitted that his fat FIRE wasn't fat enough, and started churning out fear-mongering garbage to pad his wallet.

Other, credible bloggers have even apologized for posting his stuff and opted to remove his content because it's so maligned in the community.

Basically, never read Financial Samurai, he's purposefully trying to scare you so that he can get richer from your clicks. Don't feed the troll.

BlueHouse

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Re: Primary residence as a percentage of networth
« Reply #10 on: October 10, 2021, 01:03:49 PM »
Mine is about 1/3 of my networth.  When I first bought it 9 years ago, it was about 2/3 of my NW.  It wasn't the percent of networth that made me nervous and uneasy.  It was the payments.   I think that's more important than % of NW. 

Malcat

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Re: Primary residence as a percentage of networth
« Reply #11 on: October 10, 2021, 02:18:18 PM »
Mine is about 1/3 of my networth.  When I first bought it 9 years ago, it was about 2/3 of my NW.  It wasn't the percent of networth that made me nervous and uneasy.  It was the payments.   I think that's more important than % of NW.

This is true. The whole value of the house doesn't really matter unless you plan on selling, what matters is how much cash flow you need to maintain it unless and until you do sell it.

A lot of my colleagues buy enormously expensive houses while they have massive, mortgage sized student debt, but they're DINKS making 40-100K/mo. Their 5-10K mortgage on their 7 figure home isn't actually going to put any strain on their finances, even if they wont have a positive NW for quite awhile.

clarkfan1979

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Re: Primary residence as a percentage of networth
« Reply #12 on: October 10, 2021, 05:06:50 PM »
Total net worth is around 1.15 million

Primary Residence is worth around 350K

We owe 225K on the primary mortgage.

We have 125K of equity on our primary, which is included as part of our net worth.

Abe

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Re: Primary residence as a percentage of networth
« Reply #13 on: October 10, 2021, 08:52:25 PM »
The following article below has an interesting perspective on the values of primary residence as a percentage of networth. It's surprising for me to learn that the typical American has over 70% of their net worth in their primary residence. I am struggling on this issue as we are contemplating to buy a house in Southern Cali (high cost of living). Even thought I think we can afford a certain price, but I don't know where to draw the line in the sand, given very high real estate prices in our areas.

Whether your houses are bought with cash or loans, how do you decide how big house prices you can "afford"?  Do you have buyer's remorse on over- or under-buying it? Thank you for your sharing!

https://www.financialsamurai.com/primary-residence-value-as-a-percentage-of-net-worth-guide/
"In my opinion, the ideal primary residence value as a percentage of net worth is no more than 30%."

I had quite a bit of angst about how much our payments are, but also accept that barring major climate change the area we live in will have fairly similar value in our retirement timeframe. Regardless, I wasnít willing to spend more than 30% post-tax and weíve squeaked under that. That was based on our spending patterns for several years that had worked out for us: 30% housing, 30% other stuff, 40% savings.

One thing to keep in mind for SoCal in general is the housing stock is often of poor quality as builders cashed in on the housing boom during the 90s. The cost of housing is weakly related to quality.

Iíd focus more effort into making sure the house is well-built, in a relatively fire-safe area and buy whatever size you can get for your budget. The cost is whatever the market bears, unfortunately.

moneytaichi

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Re: Primary residence as a percentage of networth
« Reply #14 on: October 10, 2021, 10:02:36 PM »
Thank you FIRE community! I am very grateful for your honest and helpful feedback!

We owned three houses before so we are well aware of the extra costs beyond the mortgage. We used to live in LCOL areas so it's really a shock to see how expensive SoCal real estate is, especially after Covid. We have moved and rented in this area for 3 years. We really like it and wouldn't mind to live here for many years. My current (new) job ties me into the location while I am holding the job. What I want to ensure is that we can still afford the house, even if I don't have this job.

I did an exercise that may be helpful for others who have similar concerns and close to/pass FIRE. I subtract the house target price from our NW, then calculate 4% and 5% of the remainder NW. If we can live comfortably with the reminder, we call it as a safe bet. That's not counting DH's Social Security in a few years and my current well-paid salary. We plan to put down 20% down payment and get a mortgage so our investment can grow with the market. This puts me at peace with our decision on our price range.

Yes, there are lots of trade-off on making this decision, but we do value having our own space. I'd agree that the attached single house in our chosen neighborhood is a luxury, and we are trying to figure out trade-off. Similar house rentals here are expensive and hard to come by. Fed fiscal and pandemic policies have uprooted the real estate market. Our location has nearly perfect weather and near beach. We worry the real estate market will continue growing in a neck-breaking pace that will price us out of the market. Thank you for your input!
« Last Edit: October 10, 2021, 10:09:25 PM by moneytaichi »

Paper Chaser

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Re: Primary residence as a percentage of networth
« Reply #15 on: October 11, 2021, 04:03:59 AM »
We worry the real estate market will continue growing in a neck-breaking pace that will price us out of the market. Thank you for your input!

You have FOMO. Not sure you should be making high-6 or low 7 figure purchase decisions based on FOMO. A house is likely to be the biggest purchase you make. It's going to have outsized impact on your finances. You have to get the big things right or you make your life much more difficult, so try to remove emotion or FOMO as much as possible to keep the chances of a critical mistake low.

Typical "money advisor" advice for housing affordability has been to have housing be 30% of monthly gross or less. We opted for less than 30% of net to be extra safe.

Fire2025

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Re: Primary residence as a percentage of networth
« Reply #16 on: October 11, 2021, 08:47:47 AM »
OP we purchased our home in SoCal within the last 5 years, so I feel your pain, this market is scary to jump into. 

We chose a price tag based on cashflow and comfort.  Then we started looking for areas of the city that we could afford to buy into and still stay in, what we considered, the west side of LA. 

Then we drove all over the area looking for the pockets of cheaper housing.  Sometimes just crossing a major street in LA will make the housing jump 50K, we were more than happy to buy on the wrong side of the tracks to get what we wanted.  We also wanted a fixer upper.

I did all our own comps and we never got sucked into the bidding wars, we never allowed the realtor to push us into a price we didn't think the house was "worth", and once a house was out of our range we moved on.  We put in 7 offers before we got our house and I feel very lucky it wasn't 20.  Don't fall too much in love with any one house, there is another house if the current one doesn't work out.

When it came to FIRE:
I don't consider the house part of my FIRE money
My stache will cover my expenses (including the house)
I do consider the house part of my flexibility plan.  If I needed to I could sell the house and move to a LCOL area

Good luck!!!

YttriumNitrate

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Re: Primary residence as a percentage of networth
« Reply #17 on: October 11, 2021, 09:16:07 AM »
Not that it makes much of difference in terms of Buffett's percentage, but financial samurai / sam dugan was off by a factor of three in his estimate of the value of Buffett's house ($300k vs. ~$900k). While not important to Buffett, is is telling that Dugan didn't do a 10 second Google search to verify his numbers.

https://douglascone.wgxtreme.com/java/wgx_douglasne/static/accountinfo.jsp?accountno=R1026290000

joe189man

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Re: Primary residence as a percentage of networth
« Reply #18 on: October 11, 2021, 12:22:11 PM »
when we bought back in 2018 the house was $524k and our investment were ~$188k so ~280%
today house is about $690k and our investments are about ~$530k so about 130% today

not sure i will every be 30% or care

ducky19

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Re: Primary residence as a percentage of networth
« Reply #19 on: October 12, 2021, 11:35:08 AM »
We are at 24% of total worth not counting debt outstanding on the mortgage. If you just look at our equity divided by net worth, we are at 9% and I'm pretty happy with that.

Duke03

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Re: Primary residence as a percentage of networth
« Reply #20 on: October 12, 2021, 12:38:20 PM »
After living in 3 homes and paying them off and rolling the equity over to the next one I have a significant amount of equity in my current house.  It makes up about 60% of my net worth.  My current house will be paid for next year and I'm not even 40.  I didn't plan on things going this way, but nothing I can do to change it now.  Yes I could pull out 750k of equity and technically put that in the stock market, but honestly I would not be able to sleep at night if I did that.  I'm not planning on moving in the next 5 years and will just add our current house payment to my taxable accounts starting next year when our mortgage is paid for and that will help to balance things out at some point.  Either way I'm going to be fine in the long run.

habanero

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Re: Primary residence as a percentage of networth
« Reply #21 on: October 12, 2021, 12:50:09 PM »
Housing is also a neat way of getting exposure to inflation om both sides of your balanse sheet. Its a real asset so should reflect inflation in the (very) long run and at the same time inflation chews away at the mortgage.

But that also requires the will to downscale and get the cash out at some point.

i_have_so_much_to_learn

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Re: Primary residence as a percentage of networth
« Reply #22 on: October 14, 2021, 05:43:39 PM »
This was a great read - thank you for posting this question.

I would say that its probably more about affordability than % of net worth. How early are you in your career, and what will make you afford the monthly payment? If its 50% of your net worth and you will still be able to save 50% of your take-home, i'd say that's great. If it's 100% of your net worth and you're saving 95% of your income, that's really good too. But there is a continuum here as well as a tradeoff for investments / FIRE preparedness, and home ownership.

Short answer: make sure you're still saving > 30% of your take home and make sure that your FI number is still able to be hit before you're 65, excluding your equity from your home.

soulpatchmike

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Re: Primary residence as a percentage of networth
« Reply #23 on: October 15, 2021, 07:50:08 AM »
I read through the article and the comments looking for a specific response.  Either I am missing something or most everyone else is...

He is recommending a max home "value" of xx% of Net worth(assets-liabilities) depending on age and not considering that the home might be mortgaged.  This is something I do not understand.  It is mixing an asset base and Net worth(assets-liabilities).  What is the purpose here?

For a data point on me, $500k home against $1.2M NW or ~42%.  However, I only have about $200k of equity in the home which puts us at ~17%.

dandarc

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Re: Primary residence as a percentage of networth
« Reply #24 on: October 15, 2021, 08:13:58 AM »
I read through the article and the comments looking for a specific response.  Either I am missing something or most everyone else is...

He is recommending a max home "value" of xx% of Net worth(assets-liabilities) depending on age and not considering that the home might be mortgaged.  This is something I do not understand.  It is mixing an asset base and Net worth(assets-liabilities).  What is the purpose here?

For a data point on me, $500k home against $1.2M NW or ~42%.  However, I only have about $200k of equity in the home which puts us at ~17%.
There's nothing to understand - financial samurai is click-bait fear mongering nonsense.

Malcat

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Re: Primary residence as a percentage of networth
« Reply #25 on: October 15, 2021, 09:34:23 AM »
I read through the article and the comments looking for a specific response.  Either I am missing something or most everyone else is...

He is recommending a max home "value" of xx% of Net worth(assets-liabilities) depending on age and not considering that the home might be mortgaged.  This is something I do not understand.  It is mixing an asset base and Net worth(assets-liabilities).  What is the purpose here?

For a data point on me, $500k home against $1.2M NW or ~42%.  However, I only have about $200k of equity in the home which puts us at ~17%.
There's nothing to understand - financial samurai is click-bait fear mongering nonsense.

Agreed. Don't read FS, it's not good for your mental health, and you shouldn't feed the troll.