Does anyone else think of a home purchase in terms of "% of net worth"?

[Count of San Francisco]

We are renters that have dabbled with the idea of purchasing a home.  Ultimately, I keep thinking about the money I want to spend as a strict % of my net worth.  I can't see myself being comfortable sinking more than 25% (and actually closer to 20%) of my NW in a home. 

So for example, if my NW was $1 million, I couldn't see myself being comfortable sinking more than $250k into a home, whether that turns out to be a 20% down payment, a 50% down payment, or enough money to buy a home outright.

Does/has anyone approached home purchasing in this manner?  It seems like a lot of people these days don't mind sinking a huge portion or even their entire net worths into a home as many view a home purchase as THE key investment in life.  But I am guessing forum members here may not think this way...

[LurkingMustache]

It's all just relative and similar to any other investment.  A house isn't necessarily an investment if purchased incorrectly.

I'd also say if you look at the very long term - it doesn't seem like a house is a losing proposition.  Now, if you are forced to sell for some reason during a down turn then yes, you could lose money on your purchase.  But I'm not sure that folks that weathered the 2008 crash and didn't sell really came out that badly.  But that's the same thing for stocks as well.  You only take a loss if you sell, which is a tenant of the long term buy and hold strategy I think a lot of people would take to here.

Outside of an investment it gives you a place to live for quite a long time, and if you could even "break even" with your purchase, I guess I don't really see what's bad about that if you compare it to renting. 

[Slee_stack]

If you are considering buying a house in SF, that sounds incredibly frightening.

At $1m NW, the average cost would be what 150% of that?  Maybe more?


I do think in % of NW in general.  I don't like buying houses at all though. I think 'owning' a home is overrated.

That said, I am interested in a balanced portfolio.  If you have 20 - 25% of NW sitting in a personal residence asset, are you comfortable with that?

That's a touch too high for my taste, but not for others.

[BTDretire]

I never did. We are in our 5 and probably last home, it's a 3 bdr, 2 bath, 1600sqft home, with a attached 2 car garage and a screened porch. It's about 7.5% of our networth. Even less if I include it as part of our net worth, which I don't. We paid cash 23 years ago.
 It's worth double what we paid for it, and worth 1/2 of it's peak price in 2007. :-)
 It is worth about $160k, in NW Florida and $1M in Southern California, hard to move though.

[FrugalFisherman10]

I don't really think of it that way naturally but I probably will now. Definitely think it 'conservat-izes' the house budget quite a bit!

I have had this lurking idea that I don't want my first home purchase price to exceed my net worth, which is a similar vein of thought. So, basically, my goal is to not buy a say $250k house until I have $250k Net worth...or to not buy a $150k house until I have $150k net worth.
why? Idk, I get to debit the asset and credit the liability, so you're really at $0 at the start, but it just seemed like a cool goal/way to think about it.
Basically, being 'in debt' for a mortgage more than my net worth sounded scary, but it's what most(?) people do, at least initially it seems.

[SwordGuy]

I can honestly say "No."

Now that you mention it, I'm not sure I would use that metric.

Net worth is a valuable number, but it is somewhat divorced from "Can I afford the ongoing payments on a house?"
Naturally, one can sell one's assets, but sometimes the cost can be quite high to do so.  And, equally naturally, you're most likely to need to when it would be least beneficial to do so.

Cash flow is also really important.  In terms of affordability (for a personal residence), I found that a mortgage at 100% of my income to be very affordable.    At 200% of income it was affordable but money was tight.   Those percentages will vary a bit based on the interest rate that's being charged, but since the prices tend to go up when credit is cheap, that's not necessarily a benefit.  (If you buy a $100,000 house and get 20% underwater, that's way better than a $300,000 house that's 20% underwater.)

[Mr. Green]

There's a difference between "net worth" and "liquid funds that I draw income from in retirement." I desire that my home be as little of my net worth as possible because I can't spend the asset in retirement. Sure there are ways to try and liberate some of that equity but none of them are as appealing to me as simply having less money tied up in a shelter.

edit: typo

[joonifloofeefloo]

Me, yes.

I just don't like having all or most of my eggs in one basket, so much prefer index stocks.

I feel I'd be comfy with 25% of my net worth as a house. Nothing in my larger area goes for that, though, so no house for me!

Some years down the road, things (my investments; local housing prices; opportunity for cost-sharing) may have sorted such that I buy here on that basis, or I move to a cheaper area. Otherwise, I continue renting, which I generally prefer anyway.

[soccerluvof4]

My home which is paid for is 10% over and beyond my" networth" is how I look at it.  I wouldnt do more than 10% and I don't count it in my net worth because you gotta live somewhere. And in no way do I look at it as an investment so bascially any money I put into it is more by choice/want because in our area things are not going to appreciate that much.

[clarkfan1979]

Most wealth for the middle class is built with buying real estate. The net worth of homeowners is much higher than renters. However, home ownership is usually just forced savings. If you can be disciplined to force your savings with renting, home ownership is not necessary.

With that said, most of my net worth was built with buying real estate.

I bought my first home in 2007 for 182K with a net worth of about -10K. I still own the house as a rental. Rent is 2200/month and mortgage/insurance/taxes is 965/month. The house is worth about 355K today and I owe 113K. I bought my second home in 2012 for 95K with a net worth of about 50K. That house is also currently a rental. Rent is 1700/month and mortgage/insurance/taxes is $650/month. That house is currently worth about 235K and I owe 77K.

[matchewed]

I don't find the metric useful. I'll put a roof over my head in the most economical way possible that is true to my values. The relative % of my net worth the home purchase is is rather arbitrary in that it is decided by far more important metrics within the economical decision.

[undercover]

A personal residence, when used strictly as such, should be viewed 100% as an expense. It shouldn't be viewed as an investment and thus I wouldn't count it as a percentage of your net worth. It's not like you're going to cash out one day and live on the street. Even if you pay it off and lose the principal + interest payment, you haven't done anything to your net worth. The only scenario in which you can eventually consider any of the equity into your net worth is if you downsize and buy a cheaper home or buy in a cheaper area and then use the excess gains to make proper investments.

The housing metric that makes more sense is percentage of housing expenses to income. Mainstream says shoot for 1/3rd of your income in housing...but most people here are closer to 1/5 - 1/10. It's probably going to be impossible to do that in SF unless you're renting.

[Saskatchewstachian]

I think that's a tough one and not necessarily useful for those just starting out.

i.e. when we bought ours at 25 we had a net worth of maybe 150k and bought a house for 380k and put 80k down. Technically the house would have been over 250% of our net worth. Were we comfortable with this? Definitely! As we had no other debt and the carrying costs were only 20% of our take-home pay (15% of gross) so much much lower than we had been approved for.

Fast forward a couple years and the house is about equal to our NW, and hopefully igoing forward it will be an ever decreasing % of our NW as all of our other investments grow.

[matchewed]

I think that's a tough one and not necessarily useful for those just starting out.

i.e. when we bought ours at 25 we had a net worth of maybe 150k and bought a house for 380k and put 80k down. Technically the house would have been over 250% of our net worth. Were we comfortable with this? Definitely! As we had no other debt and the carrying costs were only 20% of our take-home pay (15% of gross) so much much lower than we had been approved for.

Fast forward a couple years and the house is about equal to our NW, and hopefully igoing forward it will be an ever decreasing % of our NW as all of our other investments grow.

So given how that metric has changed over time given your increase of NW why (in your mind) is it gaining use?

[Prairie Stash]

The problem I have with OP is they 're thinking in static, today terms, whereas with houses you should think of long term. As Saskatchewstachian points out, NW is in flux but the flux isn't driven primarily by their house. If they had focused only on the NW the day they purchased instead of how it would change with time, they would get two different mindsets. Sask is well aware that the ratio of house to stocks changes with time, unfortunately with housing you can't buy a part of a house, its an all or nothing deal that instantly skews the %.

Right now OP is 100% not in realty, is that a good diversification? I have many eggs in many baskets, realty, stocks, bonds, job etc. The overly prescriptive % of Realty/NW is very limiting and can detrimentally increase risk if you avoid exposure to different asset classes.

[Jrr85]

We are renters that have dabbled with the idea of purchasing a home.  Ultimately, I keep thinking about the money I want to spend as a strict % of my net worth.  I can't see myself being comfortable sinking more than 25% (and actually closer to 20%) of my NW in a home. 

So for example, if my NW was $1 million, I couldn't see myself being comfortable sinking more than $250k into a home, whether that turns out to be a 20% down payment, a 50% down payment, or enough money to buy a home outright.

Does/has anyone approached home purchasing in this manner?  It seems like a lot of people these days don't mind sinking a huge portion or even their entire net worths into a home as many view a home purchase as THE key investment in life.  But I am guessing forum members here may not think this way...

You need to look at both.  The first calculation is what is a reasonable housing cost for somebody in my situation (i.e. age, income, net worth, likely future earning capacity, etc).

If you're in your twenties and making $100k and have a $200k net worth, living in a $200k house is pretty reasonable, and you just need dto figure out whether renting or buying is better financially (and taking intno account flexibility and comfort from being able to customize). 

If you're making $100k and have a negative $100k net worth from student loans, you should probably be living in much cheaper housing, and again, it's just a decision between renting and buying at that point. 

If you have a $1M net worth but are avoiding buying a $250k home because you don't want your housing to represent that much of your net worth, but are renting a $275k home, I would say you are looking at things wrong.   

[Much Fishing to Do]

I have thought of it  (from when I bought many years ago to today) of how it would be percentage-wise with my eventual FIRE net worth.  I didn't want it to be, paid off, a huge percentage of my overall net worth.

Over the years I've discovered there's only two good reasons to own a home. #1 you're not good at saving so this forces it (though frankly some of the new mortgages and oft use of cash out refinance in the recent decades has kinda killed this benefit anyway).  #2 you don't want someone ever telling you you have to move. 

I'm a #2.  Luckily my home will only be about 15% of my FIRE NW, but thats just because it was what we could afford back in the day, we remodeled with cash to make it what we wanted, and we love our neighbors/neighborhood.  IF it was worth a ton more I'd have something to think about (benefits of downsizing), but given its not I guess I just lucked out.

[redbird]

No, I don't. I keep track of it separately. Unless I sold the house, I can't do anything with that money. It's locked away until/if a sale happens. Ultimately, any physical things you own that are worth something (cars, jewelry, whatever else) is the same way.

[joonifloofeefloo]

The problem I have with OP is they 're thinking in static, today terms, whereas with houses you should think of long term.

I read the question as "current moment."

e.g.,
13 years ago, I was willing to fork over 100% of my net worth as a down payment.
In one sense, that was risky, but it was a risk I was willing to take, and I felt it was a sound one.
It worked out better than I had anticipated.

A few years in, new variables appeared that made it unwise, so I sold.

Today, my life's variables are such that 25% is the maximum I would feel comfy having in a house.

In five years, it might be different again.

I think the "percentage of net worth" thing can flex over time, as variables determine, such that it's okay to determine a percentage at any given moment.

[Prairie Stash]

The problem I have with OP is they 're thinking in static, today terms, whereas with houses you should think of long term.

I read the question as "current moment."

e.g.,
13 years ago, I was willing to fork over 100% of my net worth as a down payment.
In one sense, that was risky, but it was a risk I was willing to take, and I felt it was a sound one.
It worked out better than I had anticipated.

A few years in, new variables appeared that made it unwise, so I sold.

Today, my life's variables are such that 25% is the maximum I would feel comfy having in a house.

In five years, it might be different again.

I think the "percentage of net worth" thing can flex over time, as variables determine, such that it's okay to determine a percentage at any given moment.

That's illustrating my point nicely, the percentage is in constant flux, so how can you achieve a perfect 25% or any other number? Would you buy more house if you were under weight? Downsize if your house is over weight?

When I bought my house I started at $15k (5% down, 35 year amortization) and planned on ending at $250k of house when I paid it off. My NW went from negative (student loans) to whatever it is now. Every single year the relative proportions change since my house value will never keep up to my NW increases. No matter what arbitrary number I want for house worth, I'll only achieve it briefly. The value is dynamically changing every year, its never a static value.

A strict value, as the OP suggest, is difficult. You would need housing to increase at the same rate as NW, which is difficult if stocks appreciate faster than housing (which they have for the past 100 years on average). So if you had 1 million, put $250k in a house and $750k in stocks, the proportions would drift every year and you would need to sell stock every year to raise the equity in your house. One day though, the house will be paid off and the house will shrink as a % of NW as your portfolio grows; unless you up size to keep the ratio constant.

[joonifloofeefloo]

^ Personally, I would be applying my (changing, flexible) percentage at the time of purchase.

Similar to when I buy stocks... I buy them per my desired allocation, then leave them be even though they go all over the map from there. I rebalance them only periodically (in the case of stocks, annually).

With house ownership, I rebalanced (by selling) when the ratios went too far out of whack, and will buy again when the ratios match my desired balance.

[Prairie Stash]

^ Personally, I would be applying my (changing, flexible) percentage at the time of purchase.

Similar to when I buy stocks... I buy them per my desired allocation, then leave them be even though they go all over the map from there. I rebalance them only periodically (in the case of stocks, annually).

With house ownership, I rebalanced (by selling) when the ratios went too far out of whack, and will buy again when the ratios match my desired balance.

How do you re-balance housing in the short term? My ratio changed from about 90% to 20% in under 10 years. Stocks are liquid, houses aren't. I can buy/sell stocks for $10 (or less) but a house will lose $15,000 when I sell (or more).

What is your time frame and ratio amounts you try to keep? Do you keep housing between 20-40% over a certain time period? Is it a hard rule or loose? If its loose, do you ignore it because you need a place to live in a stable housing market or do you sell and move into a rental? If you're in a rental do you force yourself to buy in a market where it makes more sense to rent? I really don't understand how a % would work, it would be limiting. With bonds/stocks it makes sense due to their liquidity, housing doesn't have that aspect.

[joonifloofeefloo]

I don't (balance housing in the short term).
I make an allocation decision at time of purchase and when considering selling.
That's it.

Just as with stocks, if I could at all help it I wouldn't sell a house at a loss, only at a gain.

So that's what I've done so far, and foresee doing going forward.

i.e.,
I bought when I wanted 100% of my assets in housing.
I sold when I wanted 0% of my assets in housing.
I'll buy again when I can find an opportunity matching my currently desired allocation, and sell again when my desired allocation changes, based on my whole life picture. (Similar to how I will decrease stock allocation and increase bond allocation as I age.)

No time frames. Just the desired balance within my overall picture, the balance adjusting with many variables.

Yes, I move into crazy cheap rentals in between.
No, I don't force myself to buy because my desired allocation is a *maximum* of 25%. (My preferred is 0, but I'd go up to 25% if for some reason I wanted to own.)

[Fomerly known as something]

This a very "relevant" question for me right now.  I'm in the middle of an employer paid for transfer.  I have already been actively looking for where I will live next for about the past month but I'm about 3-4 weeks away from when I'm going to offer on a new home or fill out rental applications.  I see a home purchase as an expense but I have to live somewhere so it is an expense I have to have.

I lean toward home ownership for 2 reasons.  The ability to do what I want as far decoration and style inside and outside my residence and overall home purchase in the terms of monthly cash flow is cheaper for the type of property I desire if I buy. 

As others have implied what I'm willing to spend on a house is "complicated" but it mostly is based on how much it will cost me live in my future residence next month, next year and at FIRE 8 years or less from now.   Not on how it pays into my net worth although I do consider my home as part of my net worth.  Any initial costs (downpayment) are weighed as opportunity costs but they are tempered by the fact that over the years cash flow wise my housing costs will go down as my income will continue to rise until FIRE and I will eventually pay off the mortgage part of my housing costs.  I will continue to have some residential costs such as property taxes but those costs will eventually be much less than a rental similar to what I will end up purchasing. 

Crunching the numbers based on this question, right now my maximum purchase price would be 38% of net worth.  My down payment would be 16% of net worth and monthly cash-flow would be less than 15% of base pay at the time of purchase.  As a long term residence all of these numbers will decrease year over year as my net worth continues to increase and my housing costs will stay relatively the same based on my expected FIRE numbers I would fall into the 25% or less net worth. 

[Guide2003]

I think that's a tough one and not necessarily useful for those just starting out.

Yeah I don't think that rule should govern every circumstance. I know this is an outlier but I bought a place that was 4x my net worth as my first home and put a lot of work into it. Three years later my net worth had increased six times what it was going into the purchase because it turned out to be a good investment of my time. Maybe that rule works if you don't plan on flipping the house or turning it into a rental, but it seems kind of arbitrary to me. I would think for a purchase as big as a house you'd want to do the math every time to see if it could save you money while you live there or make you money when you leave it. If yes to either of those questions, then buy!

[Laura33]

Nope, not at all.  For me, it is all cash flow.  If you are shooting for ER, you start with your required savings rate and take that off the top.  Then given what's left, you figure out how much you can comfortably allocate towards a house and how much to other living expenses, always considering what you can actually buy for that money in your area.

For me, the house is largely consumptive -- I never intend to move, so it is basically a backstop asset, a "just in case the shit hits the fan" asset.  As a result, my RE plans have nothing to do with how much $ I have locked up in my house; I just needed to keep the cost of the house low enough that (1) I could continue to save sufficiently to be ready to go by my target date, and (2) I can get the mortgage paid off by then as well.

[aceyou]

No I don't.  I think of it more in terms of a multiplier of my salary.  I've heard a rule of thumb that you should take your annual family income, times it by 2, and your mortgage should not exceed that amount.  Anything above that and you hinder your ability to stache a lot of money away into the index funds because a lot goes to housing.  When I bought my home in 2011, we had a combined salary of about 110k, and I got a mortgage for 180k, which was well under that, so I felt comfortable with the purchase. 

[Rife]

For me not at all. In fact, had I listened to the guy that turned me on to this site I would be out a couple hundred thousand. The main issue is locking in most of your housing cost vs rent going up. We put 0% down at a time when our total net worth was <100k. The $385000 house is worth 620000 five years later (same house just sold across the street). The timing was everything as we locked in a very low cost post crash. A nice side effect is the gain in net worth some of which we can cash in at retirement to move to a lower COL location. I would not lump it on directly with investments. How it effects cash flow and future savings is what matters vs renting. The big thing is that it greatly decreases mobility so make sure you are comfortable where you are career wise.

[Roots&Wings]

I did, but only trying to keep it as small as possible. Much more helpful to me was thinking in terms of annual income. Is this house worth 1.5 yrs, 2 yrs, etc of my life earnings? I was happy with 1.5x annual income. Of course it also had to pass rent vs buy calc.

[joonifloofeefloo]

I like those metrics too :)

Here, a starter house would be ~10x my annual income, and NYT Rent or Buy generally urges me to rent.

[Roots&Wings]

I like those metrics too :)

Here, a starter house would be ~10x my annual income, and NYT Rent or Buy generally urges me to rent.

Yikes! It's sometimes hard to keep emotion in check with housing decisions. For me, after getting burned during the last recession and losing nearly $40k on first house, I made a conscious decision to use some hard-line cost metrics to keep emotions in check and avoid getting burned in future :) 

[Altons Bobs]

No.

[2Birds1Stone]

No, there is much more to consider.

[COEE]

This metric is silly IMHO.

What IS important is how much money you have tied up into your home (your equity).  Example: If you're worth $200k (NW), and have 20k of that tied up in a $100k home, then you have a 10% of your net worth tied up in your home.  If instead you bought a $1M home, and had 20k tied up in the home, It would still only have 10% of your NW.

Who cares how much the home is valued at with respect to your NW?  The value of your house has absolutely no bearing on your NW.

When you buy a house you need to ask yourself two questions.  First, is the payment (PITI) less than ~30% of your take home income?  Second, how much do you want to put down on you home?  The second question addresses how much of your NW you want tied up in your house. 

For the record I'm currently at about 46%-41%-13%  House-Stock/Bond-Cash allocation.  This is probably pretty rich for a house allocation - and I would have done it differently if I had it to do over again.  My home is worth about 86% of my NW.

[joonifloofeefloo]

Who cares how much the home is valued at with respect to your NW?

I do, because a particular weight can leave me in a precarious position.

When my house was 100% of my net worth, I was concerned about:

*the local housing market crashing and my owing more than I could access (equity loan or selling);
*my circumstances changing such that I could not afford the dramatically increasing property taxes and other fees, and having to do a quick sale or short sale;
*mortgage interest rates increasing (cannot lock in at good rates as in US)
*being increasingly dependent (per above variables) on tenants

Having 100% of my NW in one basket is what seemed silly to me, and because it seemed silly to me, I rebalanced (by selling) and spread my eggs across thousands of more baskets (index funds).

25% of net worth, max, frees me of all those issues.

[Skills Barterer]

There's a difference between "net worth" and "liquid funds that I draw income from in retirement." I desire that my home be as little of my net worth as possible because I can't spend the asset in retirement. Sure there are ways to try and liberate some of that equity but none of them are as appealing to me as simply having less money tied up in a shelter.

I couldn't have said it any better.  I understand that some people would sell their homes and downsize when they retire, but we just bought the downsized home to retire to instead.