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Debate: Should you count your own home in your net worth ‘number’?

Image of coins and a cut-out model of a house.

We’ve not one but two of our favourite bloggers guest posting today. What’s more they’re going at each other head-to-head! Roll up, roll up, for a bare knuckle cage fight – personal finance style! Okay, not really, Mr YFG and Fire v London are too polite for that. But we hope you enjoy their gentle jousting nonetheless.

There’s a divisive issue that has been tearing the nation apart forever. Bloggers are at odds over it. Family members squabble over it. Maybe you’ve even put off retiring because of it.

No, we’re not talking about Brexit. This is a far more ancient disagreement than that mere whippersnapper!

We’re thinking of the age-old question as to whether your home is an asset and an investment. And even if it is, whether you should count it as part of ‘the number’ you need in order to declare yourself financially-free and able to retire early, should that float your boat.

Parliament isn’t getting a great rap at the moment, but we see merit in a serious debate. So let’s have at it!

At the end you’ll even get to give your (indicative) vote.

  • Proposing the motion “This house believes it deserves to be included in your net worth” is FIRE v London, who is here to make the argument FOR including your home in your Financial Independence (FI) net worth figure.
  • Opposing the motion is Mr YFG, who will make the argument AGAINST.

And are you sitting down, dear reader? Because there’s a twist…

Warren Buffett’s wise sidekick Charlie Munger once said:

“It’s bad to have an opinion you’re proud of if you can’t state the arguments for the other side better than your opponents.”

We’re going to put this to the test: Each debater is arguing the opposite of what they believe.

Let’s see if we change anybody’s mind. (Maybe even our own?)

We now call upon FIRE v London to get proceedings underway.

FIRE v London: Property should be counted in your net worth

Gentle readers, the argument I am putting forward today is nothing short of simple common sense.

Property is big!

Property is the biggest type of asset out there. In the UK it is 51% of our net worth, dwarfing all other types of asset.

Why would retail investors like us FIRE1 types ignore the biggest asset class?

Of course not all properties are residential properties. And not all residential properties are your home. But what we are discussing in this debate is your primary home – where the FIREr lives – and whether this home, and any associated mortgage, counts in the Net Worth calculation you tend to do for FIRE.

The average home in the UK is worth around £250k. In London it’s more than £480k.

For most people, the savings needed for Financial Independence are around £1m. So in that context, the house you live in is an important number – potentially half of the total assets required.

Why would we possibly exclude the most important asset from the calculation?

Big as an asset but also big as an expense

Of course, property is also the biggest cost for most households. It is around 22% of disposable income in the UK on average, and a lot more for #GenerationRent – who in London pay on average more than £1,600 per month to rent a home.

From the point of view on somebody on the FIRE path, this is important. To be Financially Independent one needs to be able to meet all your living expenses, and this obviously includes housing costs. If you own your own house outright, with no mortgage, you’ll have a significantly lower cost of living.

So, in fact, this house believes not only that your primary home, as an asset, should be included in your net worth, but that your housing costs should be included in your assessment of FIRE. You can no more disentangle your primary home, as an asset, than you can forget about paying for electricity and broadband.

So far, so much common sense.

Rent vs buy? An important side question

In fact once you move beyond common sense, there are good practical arguments for considering both your asset and your housing costs in your FIRE deliberations.

It may even be that – counter-intuitively – renting rather than owning turns out to make FIRE more achievable.

Certainly in parts of London with low rental yields, renting may prove significantly cheaper, especially if you can obtain decent investment returns on the freed up capital.

This house might be better off sold! But you won’t know if you don’t consider it in your net worth.

UK property has important tax benefits

But never mind the size of it, look at the quality. Property is not just a large asset, it is also – especially as your primary home – one of the best assets. Particularly here in the UK.

In the UK property holds a special place in the heart and mind of everybody – not just those Englishmen whose ‘home is their castle’.  In Britain, property investment is ‘safe as houses’. Property is a ‘one way bet’. Stocks and shares? That’s ‘gambling on the stock market’, whereas you can put your trust in ‘bricks and mortar’.

As you can see almost every week in the Sunday Times’ Fame & Fortune column, where successful people make these arguments all the time. And they are successful people, so their arguments must be right, right?

In the UK, the taxman agrees with Fame & Fortune. Property is taxed differently to other types of asset. Crucially, there is no capital gains to pay on your primary home. If you pay off your mortgage, live in your home rent-free, and ultimately have no capital gains to pay, your primary home – the single biggest chunk of wealth for most of us – attracts no tax.

As in most places, here in the UK property is also arguably the key asset that it makes sense to borrow to buy. This means that you can get leveraged returns on it. This means you’d be crazy not to – especially for your own home, where mortgage rates are particularly low.

So, property is different. It is a large and obvious asset for retail investors to buy. In owning it you eliminate rent as a housing cost. There is no tax to pay, and you can leverage up your returns. You’d be foolish not to invest in it.

Let’s hear no more nonsense about excluding it from your net worth. Property is too big to exclude, and too attractive to exclude. That’s why this house believes it deserves to be included in your net worth!

But now I turn to Mr YFG, who is going to oppose the motion.

My YFG: Does my asset look big in this?

Whilst my honourable friend is right to call our home big, the case for it being an asset is less clear.

That’s because our homely abodes don’t generate any income or cash towards our FIRE target.

As Robert Kiyosaki of Rich Dad, Poor Dad fame points out, a home creates a negative cash outflow. For example, a mortgage, maintenance costs, bills and taxes. That makes it a liability!

My friend and rival also correctly points out that whether you should rent versus own your own home is a serious question to ask. This follows from the above. A bigger, more valuable house means you need to hold greater and greater amounts of other assets to balance out the cash outflow.

It also means leaving money on the table. The research shows that in the UK, investing in the stock market has beaten investing in property.  Money in your house is money out of the market. Money out of the market is the lost returns needed to finance FIRE.

Overall, the bigger your house, the harder it is to reach FIRE!

Alternative facts

Putting aside whether a house is an asset or not – can we even claim it’s big?

Valuing a home is very difficult. Unlike shares in an ETF (or FIRE bloggers), no two houses are alike. Sure, we can get a valuation from our local slick-backed-hair estate agent. But the ‘true’ value is only known when you come to sell.

Those mansions in Florida were quite valuable until they weren’t. Likewise the owners of former homes in Dunwich thought little was safer than houses… until the North Sea developed a taste for bricks and mortar.

This means that if you include your own home in your assets column the number is a little bit ‘fake news’.  It’s not a ‘real’ number like the cash in your bank account. It may never be realised.

Liquidity

The main point of our FIRE stash is to fund our living costs. All those craft beers and avocado on toast won’t pay for themselves! And this is very difficult with a house.

As mentioned above, a home generates negative cash flow. But even thinking in capital terms, it’s tricky to realise capital amounts, too.

Unlike stocks and shares, we can’t just sell piecemeal amounts of our own home into the market as needed. Nobody would be interested in buying a quarter of my guest bedroom, and not only because of the mound of bric-a-brac I’ve stored in there.

To realise money from our own house we have to sell it all or else take out big remortgages. That makes your own home a really bad investment for funding living costs.

Mums and their sons

My honourable friend is quite right: An Englishman’s home is his castle. I love my home. And this level of emotion makes it very difficult to stay rational.

My home is the best home. Just like my mum’s son is the best son in the world.

So when it comes to my home, I have a huge blind spot. I’ll always be tempted to bump the value of my home up in a way that I can’t with my index fund investments.

My home is more than a number in a spreadsheet. As a rational accountant I must guard against that, and discount whatever value I magic up for my home.

In summary my case is this: we can’t categorically say a home is an asset as it loses money. Whilst it’s a big expense, it’s hard to put a real number on it. Any number we do conjure up is contingent on a future star-crossed home we’re in love with making it rain in our bank account. And even that number is probably unrealistically high because who doesn’t love their home?

My case rests.

Who is right? You decide

Well, there you have it. Two opposing points of view on a key question facing any ambitious seeker of Financial Independence.

What do you think?  If you rent, is buying your own home part of your financial plan? If you own already, what will your financial independence look like in the future? What arguments are we missing?

Please vote in the poll and expand your thoughts in the comments below!

Should you include your home in your Financial Independence net worth sums?
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{ 76 comments… add one }
  • 1 Mark April 16, 2019, 10:12 am

    I have voted yes but my own view is as follows. The land on which a house sits is an asset, however the house itself is a consumable and should not be counted. This is because the land is enduring (barring you living on a cliff aaginst the North Sea) and the house itself will eventually need to be bulldozed and renewed.

  • 2 dearieme April 16, 2019, 10:20 am

    Would we be poorer if someone stole our house? Yes, because we’d have to pay rent or buy a shack somewhere.

    Could we choose to sell our house for filthy lucre and buy something else instead? Yes.

    So of course it’s a bleedin’ asset.

    If the necessities of life include shelter, heat, food, and water, and it provides the first, then it’s an asset. If dividends from shares provide for the second, third, and fourth, then shares are assets too.

    Perhaps the fact that it is an asset needn’t determine whether it be recorded as an asset – I leave that decision to devotees of the Sacred Mysteries of Accounting.

  • 3 Tom Colvin April 16, 2019, 10:35 am

    FIRE calculations are always personal, reflecting your particular goals and risk appetites. Mine starts from the base of having my permanent home mortgage free. That for me is point zero. I then need enough in the FIRE pot (across any asset class, including property which can or will be sold) to cover my living expenses in perpetuity – expenses which will be lower by dint of having no rent or mortgage costs.

    As such I feel the value of your main home should be excluded. However that does not necessarily mean your current home. You might, for example, be living in London, earning and saving towards FIRE, with the plan at retirement to trade down to the countryside (in price only – in most other respects it would, in my mind, be a trade up). In this situation, it would arguably be valid to include the expected differential (after fees, moving costs etc) in your FIRE pot.

    But unless you are at some point going to liquidate the value of your house, it should be excluded from your FIRE number.

  • 4 Whettam April 16, 2019, 11:33 am

    Like the debate format. But I haven’t voted because they are both wrong 😉

    I’m not interested in Net Worth as a metric, I don’t believe its useful (because of course it includes your home, which skews the number) and its not something I track.

    However I do track “retirement savings”, this includes a nominal sum for how much equity we will release, because we intend to relocate / downsize when we retire, so a proportion of the property value will become accessible, in terms of our financial objectives.

  • 5 We There Yet? April 16, 2019, 11:40 am

    Should we count our primary residence in our net worth number – unequivocally yes because an asset we own its part of our net worth. Should we count our home within our FIRE calculations; perhaps. Why perhaps? Well on one side we need to live in it, hence it’s not worth a bean unless we decide to live in a field and get very cold, and some people have an emotional value attachment to their home. Personally I have already FIRE’d and my home is not included in the net worth number on my decumulation spreadsheet (although it does give a little back of the brain comfort as backup cash for a financial meltdown). BUT on the other side of the FIRE usefulness argument of the net worth of the home; one can borrow against it if one finds a better investment option, one can trade down and release some equity (if there is any equity minus costs), one could swap the equity for a rent option if the investment case stacks up. One can use it (eventually) as part of a bequeath outside of decumulation. It’s also capital gains free (at present but beware the nasty government knows there is lots of lovely property lucre to extract from the grey brigade in the future!). I guess for some people (not us fire types of course!) the main point of counting your house in your net worth is to pointlessly brag about what your worth to anyone else who will listen… if your that way inclined….Or perhaps (and much) more usefully use that net worth number it to work out how to best reduce inheritance tax across all of your assets using tax efficient lifetime planning thus improving your FIRE calculations (I know, this option is boring, and no one in the pub now knows that your minted). As I’ve alluded to above, the main point of counting your house in your FIRE calculations is to help work out now, or in the future, if releasing some of the locked in ‘value’ (on balance with other considerations), will help you FIRE earlier. Oh dear now it seems I’ve sided with both but for different reasons.

  • 6 Michael April 16, 2019, 12:11 pm

    Isn’t the real answer that it doesn’t matter? I’m with Whettam above that net worth isn’t really a useful number. Once you’ve calculated it, what do you do next? Or do different depending on what it is?

    For any kind of planning purpose, it seems to me that you should consider your home. It’s something that you own, which is going to effect your outgoings (both positively in the sense that you don’t have to pay rent and negatively in that you have running costs) and which can ultimately be sold. Plus, while you still have a mortgage, you’ve got that commitment. So it needs to be factored into your financial thinking.

    You can do that thinking by saying ‘My net worth is X. Of that, Y is made up of my home which is a low liquidity asset. And if I sell it, I’ll need to find somewhere to live.’ Or you can think ‘My net worth is X. I also own my house, which is worth Y.’

  • 7 The Rhino April 16, 2019, 12:19 pm

    What a great idea – there is genius in arguing the others case.

    Overwhelmingly in favour of FvL here, I think he had the easier job! His argument is a lot more quantitatively compelling than YFGs offering.

    The debate probably lies within the fuzzy definition of the question.

    ‘Whether your home is an asset?’

    Well an asset is an item of property owned by a person or company, regarded as having value and available to meet debts, commitments, or legacies. Home has to be an asset under that definition, otherwise no-one could have a mortgage?

    ‘Should you count your own home in your net worth ‘number’?’

    Well if we agree a home is an asset as per above then most likely yes?

    ‘Whether your home is an investment?’

    An investment is to allocate money in the expectation of some benefit in the future. Well this is getting a bit more subjective? I’d argue for almost everyone a home looks, tastes and feels like an investment, but if someone told me that genuinely wasn’t their expectation then who am I to argue?

    ‘Whether your home is an asset *and* an investment?’
    Well the software engineer in me says if a home is always an asset (true) but a home being an investment is subjectively true or false – then the answer to this logical AND is dependent on whether you can convince yourself a home is not an investment?

    ‘whether you should count it as part of ‘the number’ you need in order to declare yourself financially-free’

    Now we are in totally subjective territory. This is (quite rightly) based on what sums people are doing to bag FI. They may or may not involve a spreadsheet cell or cells factoring in what their home is worth?

    I’m surprised the poll is running as close as it is!

  • 8 ZXSpectrum48k April 16, 2019, 12:38 pm

    We own four residential properties, all unencumbered. Two properties we rent out. Most would consider these part of our net worth as assets that generate income. This is correct if we think in purely in spot terms (i.e. as of today). These assets, however, exist to hedge a forward liability: my childrens’ need for shelter when they are adults. As a result, I ignore them in my net worth calculation (and consequently I can also ignore the PV of the liability they hedge).

    The third house my retired parents live in. It’s doesn’t generate any income but it’s an asset I own. It’s a useful simplification, however, to also ignore this in my net worth calculation. Instead I assume that the cash raised by selling this house will hedge their future nursing costs.

    The final house is our primary residence. At some point, after the children go to uni, we’d probably downsize and move away from London. This would likely release some capital. So I tend toward including 25% of the value of the house in my net worth calculation.

    Both FvL and YFG are correct but from different positions. In purely spot terms (i.e. as of today) FvL is correct: your net worth is simply current assets minus current liabilities. In future terms, however, YFG, is more correct. Your net worth is the PV of your current assets (the current market price) minus the PV of your future liabilities.

    F. Scott Fitzgerald probably got this one right: The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function.

  • 9 Chris April 16, 2019, 1:33 pm

    For me, FIRE is a stepwise process to covering future bills (including for fun) without having to work. I’m less interested in net worth – than my ability to knock those bills off. Net worth is simply a means to an end.

    As an uncomplicated person owning my house outright means my outgoings are reduced in the same way that installing solar panels did. I don’t care what my solar panels are worth, and I don’t think about of my house that way either.

    But if I were buying a big house in London with expectations of moving to a smaller one in a cheaper part of the country while expecting the London place to outpace elsewhere – then I’d consider it as part of my net worth number for the purposes of FIRE.

    Since I live in a modest place in a cheap area that is fully paid off, I don’t – although I recognise it could probably generate income via lodgers etc. I also recognise that should I become too infirm to live there, it will probably pay for a nursing home for a while. I could also, but am unlikely to, sell it and live in a caravan.

    But it’s easier for me to think of outright home ownership as a housing bill paid rather than contributing to net worth. I appreciate lots of clever people are doing smart stuff about opportunity cost of renting v mortgage v outright buying v investing etc, but I am not inclined that way.

  • 10 John B April 16, 2019, 1:36 pm

    Your house is clearly an asset. Historically it is has been a good investment, as you’d expect something that can be highly-leveraged in a rising market with low taxation. It can be compared with other assets by the hypotheticated rent you’d be paying (less maintenance costs).

    FIRE is all about getting to a point where a safe return on your pot matches your expenditure, after tax. If you have a house, your income generating pot will be smaller, but so will your expenditure. Having a house reduces risk, as it removes the uncertainty of future rent changes, so your SWR can be more bullish.

    Houses are problematic for those wanting to run their pots to near zero, as the value is hard to realise. So people tend to plan to die with houses, which requires a much bigger pot.

    Personally, I don’t a house, but will inherit one. I run my planning forward in anticipation of that, with net wealth jumps/redistributions over 40 years when I inherit, sell it, move to a different house, downsize, move to nursing home etc. I treat it as an asset with very low returns that allows much lower expenditure until the nursing homes fees bite.

  • 11 Reed April 16, 2019, 1:42 pm

    Yes.

    At the moment we rent, at a cost of about 2.5% of the value of the property

    A property you own has the value of the imputed rent, less expenses that you would pass to the owner.

    So when you calculate your FI, you need to decide to rent or buy your shelter. Buying reduces your liquid assets, but reduces your liquid outgoings (rent)

    In our retirement calculations – it won’t really make a difference if we rent or buy. Rental actually looks better, if not for the buggeration factor of owners changing their mind (oh – for a German rental market!). So we will probably buy when we decide where we want to retire.

    So, yes, property is in net worth for me. Not because my home is my castle, but because my home is either my rent or my imputed rent, and as such can easily be valued.

  • 12 Scott April 16, 2019, 1:42 pm

    I genuinely don’t understand the debate on this topic (and I don’t just mean this article.) The point has already been made above, but include it in your net worth or don’t according to preference.

    What matters if you’re striving for FIRE is whether your savings are sufficient to live off. Unless your retirement plan is to live in a caravan or similar, then it would be rather shortsighted to count home equity as covering x years’ living expenses.

  • 13 Henrik April 16, 2019, 1:52 pm

    Hey,

    I’ll propose a thought experiment. One buys a house worth £500k with a deposit of 20%. The day after the transaction completes should I adjust my net worth down by 100k or leave it as it is? On the other hand if you sell a property does your net worth go up? This sounds really strange from an accounting point of view, doesn’t it?

    I would argue that the net worth the day after the transaction completes is not changed at all. (This is ignoring stamp duty and other transaction costs, of course)

    So I would add the primary property to the net worth.

  • 14 { in·deed·a·bly } April 16, 2019, 1:58 pm

    Well done to both debaters for putting forward strong arguments.

    For mine, an asset and an investment are not one and the same.

    An investment can be reasonably expected to produce some combination of capital growth and free cash flow generation.

    An asset has a realisable (though often subjective) monetary value attached to it.

    Some assets could be considered investments (e.g. shares, patents, vintage designer handbags), while others are almost certainly not (e.g. your IKEA furniture, the pots and pans in your kitchen, the random box of old chargers and cables for long since discarded electrical items).

    A house is certainly an asset. Whether it could also be considered an investment is debatable.

    If net worth can be simply defined as “what you own less what you owe”, then all assets and liabilities should be included.

    However comparing that metric to how a person may calculate their FI number (e.g. withdrawal rate, free cash flow, inheritance/lottery win, etc) is conflating two distinctly separate concepts.

  • 15 SeanM April 16, 2019, 2:03 pm

    I voted no purely because the question included the words “in your Financial Independence net worth sums”.

    I have two net worth numbers i.e. one including the home and the other excluding it.

    The former I use when thinking about the value of my estate as the taxman will see it, what IHT my estate may or may not be liable for and what my children are likely to inherit.

    The latter is used when I’m thinking about what income-generating assets I hold that could generate an income to supplement my final salary pension, if such were needed (it isn’t, at least not yet, but could be in the future if part-time living assistance was needed as we get older).

    I know my house could be used, in various ways, to generate additional funds but I would regard this as very much a last resort and therefore prefer not to include it when considering potential future income.

  • 16 Mathmo April 16, 2019, 2:21 pm

    I agonised over this when setting up my personal accounting, in fact in the comments on this blog. My rubbery keyed friend is correct that it’s about horses for courses and it all depends on what you use the numbers for.

    I think of my primary (and 2nd) residence separately and calculate an implied rent from it (the amount I could get by renting it out and living elsewhere). I think of any mortgages as leverage on my portfolio, not reductions in house value. Additional rental properties are just business assets like any other investment, although I keep my liquid investments separate for re-balancing purposes. Hard to rebalance a flat.

  • 17 Cashflow Cop April 16, 2019, 2:50 pm

    I agree with this thinking, but at the end of the day it all depends on why we are measuring it in the first place like others have said.

    Once we know the purpose, then we know whether or not to include it.

    For me, I voted no because I want to be conservative with my numbers. Yes, there is a risk that I might end up working longer as a result, but at the moment I’m okay with that.

  • 18 Keith Cole April 16, 2019, 3:16 pm

    I think your house is an asset, but of your heirs, rather than you. Everyone needs someone to live, and unless you are going to compromise late in life (care home aside) there is no real, realisable value from your home for you- not necessarily so for your beneficiaries.
    I am fortunate in having bought a flat in Hong Kong in 1994 which with a couple of sales and purchases and huge valuation increases has resulted in the initial investment going up by 10X in nominal value. Is that real?. No, unless I return to live in the UK where more space and quality is a lot cheaper. Since my family and friends are here that’s very unlikely. Selling down to a smaller flat- maybe if the kids have definitely left- who actually knows this?- but at an agents and stamp duty cost of circa 6/7% why bother when it will inevitably reduce my quality of life for years to come?
    Its the kids asset, not mine- although don’t tell them since the little buggers need to learn lesson no 1. The need to work, serious hard, to stand on their own two feet.

  • 19 Brod April 16, 2019, 3:52 pm

    I voted yes. It’s part of my net worth.

    I think of it as a two more or less unrelated questions – is your home an asset? Well, I can sell it for some amount of money so clearly, yes. The second part of the problem – where do I live and how do I fund it? – is really independent of the first part. And some people may include it as an investment too – they expect to make money on owning a home.

    Incidentally, there’s a lot of willy-waving going on here. The question clearly states “home”, so why are people talking about their rental properties? They’re somebody else’s home – your poor exploited tenants 🙂 JAT.

  • 20 oldie April 16, 2019, 3:54 pm

    (tongue in check)
    I wonder if you left your house on your death to local dog’s home, would your children think they had lost an asset?

  • 21 Alan April 16, 2019, 4:04 pm

    I include our house as an asset and the outstanding mortgage as a liability in my calculations of Net Worth.

    If everything went pear shaped I think the bankruptcy court would agree with me.

    Whether it is a “useful” asset in terms of achieving FiRe is different and I ignore it in my thinking. The costs associated with its upkeep are included but not its capital value as I can’t sell a “bit of it” and have no immediate plans to move.

  • 22 Cigano99 April 16, 2019, 4:09 pm

    Thought provoking post and comments, the point of the home being an Asset rather than an Investment certainly resonates with me.

    From the PoV of achieving FI I have chosen not to include the value of our home in the calculation, since having to sell said home, to release equity to live on doesn’t equate to personal goal of FI, which simplistically requires a portfolio of investments large enough to be able to support our current standard of living without either of us needing to “work” again.

    In years to come we may choose to sell the asset which is our current home or downsize to release additional cash should we need it in our dotage, for now it’s reassuring to know that we own that asset outright and that whilst it’s illiquid there’s value there should we ever want/need to draw on it.

    Whether the value/equity in your home is or isn’t included in your net worth number is indeed about personal choice, but I am have no regrets in choosing not to include the value of our home when in calculating our FI number.

  • 23 Glenn April 16, 2019, 4:37 pm

    I’ve always thought of my home as an asset to be included in NW, but I think it depends on risk profile and age.

    This time last year we had an unencumbered home, but we’ve now borrowed against it to buy a few BTLs, I couldn’t sit idly and watch all that equity do nothing, it’s an asset that can be invested by proxy.

    Interestingly, I think almost everyone misses one benefit of doing this: I can now claim the mortgage interest on my residence as a cost of doing business and deduct it (admittedly not quite as much as in previous years) on my tax return. How many people can say they’re able to tax deduct their home mortgage 😉

    Thus, I certainly view the equity as part of my NW, because my NW is just anything that can be employed to make my NW even bigger…

  • 24 Playing with Fire April 16, 2019, 4:42 pm

    From my read, FvL makes a strong case that a home is an asset but doesn’t make the case that it should be included in a FIRE net worth number. As others have said FIRE net worth number is a different thing to net worth.

    At the extreme example, if your (mortgage-free) living expenses are £10k a year and you have a £250k house, (or £333k, etc) with no other assets, you cannot FIRE based on the 4% (3%) rule-of-thumb. You can present your credentials at the £250k net worth club, but there will be an awkward moment at Tesco when you try to hand over your half-brick and explain the maths.

  • 25 The Rhino April 16, 2019, 5:34 pm

    @ZX – wow they are some chunky future liabilities you have taken onboard!

    The concept of funding four families housing requirements is extreme!

    As an aside do you think if your parents had provided for your housing needs it would have:

    a) been really handy?
    b) been inconsequential?
    c) been a dis-benefit in some way?

  • 26 Jonathan of Cambridge April 16, 2019, 5:55 pm

    The very question of whether one should write the residence as an asset when calculating the independence number obscures the more fundamental question of whether one should care about the Number at all, rather than focus on generating enough income to survey on for the rest of one’s natural life.

    If we look at income and outgoings, then the picture becomes less controversial – our housing needs are an outgoing which renters are very familiar with, and the income produced by a house is the accommodation which it throws off, and which we are able to consume or sell. A single person living alone in a four-bedroomed house is usually wasting some of that accommodation/income. Few people choose to rent houses which are larger than they need (it’s costly!), and it’s usually a sign of not having done a proper analysis when people own larger house than they need for long periods.

    It’s disappointing to see no mention of taxation of imputed rent above – this used to be levied in the UK, and still is in countries like Denmark. I guess this is another casualty of focusing on capital value rather than periodic income generation.

    A house which is in the right area is a great way to match one’s accommodation liability, and matching assets to liabilities is what sensible investing is all about. Matching income to outgoings is the most Financial-efficient way to live a worry-free life.

  • 27 Matthew April 16, 2019, 6:19 pm

    The eyes to the right, the nose to the left…

    For pride, include it, for simplicity exclude every cost that’s funded

    My house is smaller than my db pension…

  • 28 HariSeldon April 16, 2019, 6:48 pm

    I voted No but I have two figures for Net Worth and you guessed it one includes the house !

    I have a net worth of just financial assets that support our lifestyle, on the basis of free rent of our mortgage free home and a larger count everything Net Worth.

    I consider the possibility, that in later life, renting might be an attractive option.

    The less life you have left, the less attractive rent free property is, at the expense of capital tied up and DIY maintenance.

  • 29 SLG April 16, 2019, 8:52 pm

    I voted yes. I assume for simplicity it’s an asset you own but not an asset you can realise. What’s in a number?
    Financial freedom is about controlling what you spend too. Housing is a large proportion of spend, if rent*inflation works better than fixed mortgage payment on mortgage interest rate – inflation, that’s a choice you make.
    I made mine and bought somewhere to live at 2008 peak prices. Looks good on paper now but who knew back then?
    It should be part of networth but “mine is bigger than yours?” If you think networth is for willy waving, imho you may have wandered into the wrong FIRE pit…

  • 30 Barn Owl April 16, 2019, 9:05 pm

    I have not voted. The answer depends on how you do your “Financial Independence Net Worth Sums”. You can and should reach the same conclusions with either assumption.

  • 31 ChrisMack April 16, 2019, 11:23 pm

    Like many others I include my residential property in my net worth overall calc but when I run my FI numbers for living on it isn’t included. For me one of the hidden values of including it in your overall number is that it can illuminate the fact that you are very long one particular type of (illiquid!) asset. When I originally ran my net worth number I think about 65% of my net worth was in my property. Seeing this really helped, from a behavioural finance perspective, push me to put more into the markets and less into paying off my mortgage which previously took priority. This was because I saw it made sense to achieve more balance in my overall portfolio, and diversify my risk. I don’t buy individual stocks because they feel too risky – one entity, one market, one country, one currency….. lots of similarities to a house….

  • 32 beeka April 17, 2019, 2:17 am

    Like some others here, my FI figure does not include assets I can’t realise now (e.g. pension) or those that doing so would require a lifestyle change (e.g. selling my home and renting). However I have a second ‘how to I compare to Warren Buffet’ figure that includes everything. Having both figures makes me think carefully about what FI means to me and how any independence might be structured.
    Also the point ChrisMack makes about the overall asset allocation becomes clear: although even with that knowledge I have opted for the simplicity / security of wanting to be mortgage free over the roller-coaster that is the markets.

  • 33 John Porcella April 17, 2019, 4:14 am

    Who says that a house that you live in cannot generate income? Have you not heard of the Rent-A-Room scheme where you can rent out a spare room or two (or more!) and earn something like £7,500 pa and not only not pay a penny in income tax, but you do not even have to include it in any returns!

    Indeed, I was talking to a friend yesterday, who is looking at getting architects in to extend their house, so that they can rent out more bedrooms! Talk about making that asset sweat!!

  • 34 Amit April 17, 2019, 4:15 am

    I voted no. Mainly because in a liftetime cash flow forecast, it is possible to deal with the effects of buying versus renting without reference to house equity value. Unless you are intending to rely on equity release to fund your FIRE (which imho is not advisable). I can’t see a point of it being in the net worth.

  • 35 Brady April 17, 2019, 6:17 am

    I agree, I include my mortgage in net worth but not the value of the house, this means overpaying mortgage improves my NW figure but vague & optimistic house valuations won’t.
    I may downsize in future but don’t think the cash it would release would be life changing and also wouldn’t want retirement to depend on it.

  • 36 JimJim April 17, 2019, 6:53 am

    I cannot vote, as many above I could run the numbers either way and get the same answer. What interests me is that I can live comfortably off my income (human potential or generated through assets) until I (we) clog it. The sums make sense both ways. Living in a mortgage free average house price house somewhere fluffy with good views and nice neighbors pays me a dividend I cannot add to a balance sheet unless you could say I would pay more for the experience if I moved. (which I would, who wants to stare at a wall!)
    If the bankruptcy courts had me before them tomorrow, only my tools and my bed would be saved, so yes, it is an asset however what interests me is the type of asset it is.
    If I buy in say London, my cost of purchase is high (I can afford a smaller market share). Looking at past performance, (usual caveat) the “asset” out-performs other areas in the country, if I rent it out my “dividend” is big, if i sell it my tax free capital gains could be high.
    If I buy a house in the country, I can afford a larger market share (but why would I want to be over housed unless it was for gain?) Past performance has been poorer (but we all work online now don’t we???) you get the picture?
    Does one behave like a FTSE momentum share and the other a value share?
    In my experience, I have lived where the work is – and – I have chosen to work where I wanted to live.
    I prefer the latter.
    Jim

  • 37 Uncertain April 17, 2019, 8:05 am

    I voted Yes but essentially your ‘number’ required to attain FIRE as well as being rather uncertain is also highly dependent on where you intend to live.
    A desire to live in a town house in Chelsea will require a much larger number than contentment with a one bedroomed flat in Redcar.
    If one has property in one but is planning to switch from one to the other, ones other assets will need to be sized appropriately.

  • 38 Nigel Root April 17, 2019, 10:29 am

    Thanks for the article.
    What matters here is “What do you want?” and “What choices are you making?”
    If you want to live in a tent, or more realistically, move out of London to somewhere where houses are a fraction of the price, or emigrate, count the house as it’ll make a huge difference. If you’re happy with where you live and you’re not going to move, don’t count it. Then adjust the amount you want to save accordingly.
    Nigel

  • 39 Fremantle April 17, 2019, 3:20 pm

    I’m with Reed. Private houses are assets insofar as they generate imputed rent.

    Nevertheless, from a cash flow perspective, houses represent a cost for bother renters (rent) and owner occupiers (maintenance and insurance).

    As far as the tax man goes, imputed rent is tax free, as is any capital gain from the sale of the primary private residence.

    However, the capital locked in your property is relatively illiquid, so difficult to value. Imputed rent is less difficult to value, just look at the local rental market, but who needs the rigmarole to estimate the value of an equivalent asset to generate the imputed rent that you aren’t going to actually spend. I’m not sure the Zoopla estimate is as reliable here, because turnover is less than the rental market, and property value is more subjective.

    Further, including private residence ignores the point of financial independence – having sufficient assets to be able to cover costs, be it income generating or capital draw down.

    So I voted no.

  • 40 theFIREstarter April 17, 2019, 10:30 pm

    Very entertaining format!

    I see the current vote is pretty much as close as Brexit was, so that was a very good comparison to make at the start 😀

    For me the argument is pretty moot though. There are 3 situations:

    1. You own your own house outright and so housing costs do not make up part of your livings costs. You then chuck your yearly expenses figure into your desired SWR/FI Number calculation to find out how much money you need in stocks/bonds/etc…

    2. You have a mortgage on your house. FI number is almost the same as above but you need to factor in the fact that at some point your mortgage will be paid off, and so you shouldn’t count your mortgage expenses as something that will last forever and always need to be chucked into your expenses/SWR/FI number calculation.

    3. You rent, and so the expenses/SWR/FI Number calculation is a very simple one.

    Obviously there are slight variations on any of the above depending on whether you plan to move, and if the move would be upsizing or downsizing the house, but you would just have to recalculate your SWR/FI number when you move.

    Net Worth is pretty meaningless to me*, I just want to know whether I am FI** or not and the above 3 scenarios cover all possible situations for 99% of people I’d have thought.

    *But if pushed, I would include my home, because, well why not? It’s something huge that you own and you will probably at least get what you paid for it if you ever sell, so that seems fair to include it simply on that basis. But at that point the whole NW thing just becomes a d**k measuring contest IMHO because there is no real use to the figure apart from going “Look at my massive Net Worth!!!” – it’s a bit like GDP in that respect? It’s a (potentially) big and impressive number but it doesn’t actually tell you how that person is getting on in their life, if they are happy, healthy, have their freedom, and so on.

    *Leaving any SWR arguments out of this, as that has already been covered in other articles in depth!

  • 41 Gentleman's Family Finances April 18, 2019, 10:09 am

    Of course you should include property in your net worth figures in the same way that you should include your/any mortgages in it too.

    Our situation is that we are approaching FI and our mortgage costs us about £200 a month in interest (+£500 capital) and if we were renting we might pay £900 for the same property. If you genuinely didn’t think of your home as an asset, then you’d say that renting is about the same as owning – since there’s the opportunity cost of the deposit, the cost of maintenance etc…
    However, people don’t think that way because we know that that £500 in capital repayment is not money down the drain. Also, adding on another £700 to our monthly outgoings for rent would mean we are nowhere near FI.
    Our FI figures for early retirement just look at funds available before retirement (SIPPS/pensions + housing equity…) – you’d be crazy to think that you can use your house as an ATM in retirement.
    How to square early retirement with giant mortgages? That’s our problem but the house is an asset (not that it make you money but it saves you rent) and I factor it into our net worth.

  • 42 stonge April 18, 2019, 10:23 am

    The big worry for me is whether the government considers my house to be an asset.
    I could imagine a Marxist Corbyn/McDonnell government introducing a property tax based on the value of one’s primary residence without any regard for how a dweller would be able to find the cash to pay such a tax, on the grounds that property is theft (unless owned by the state and hence by the party officials).

  • 43 The Rhino April 18, 2019, 4:04 pm

    @Stonge – govt has considered your house a taxable asset for a long time, be it labour, con or lib-dem – thats what council tax is. community charge before that and domestic rates before that.

    but i take your point that labour in its current guise may well try and *increase* property tax if it had the opportunity

  • 44 brod April 18, 2019, 4:43 pm

    @Rhino – and why not tax property?

    Numerous benefits and very hard to avoid.

  • 45 The Rhino April 18, 2019, 5:16 pm

    @Brod – I’d agree – it seems sensible to tax it in some form, although the council tax and stamp duty combo are maybe not the most sane? But half the battle with tax is getting people used to it? More feathers, less hissing…

  • 46 ZXSpectrum48k April 18, 2019, 10:40 pm

    @Rhino. Off-topic but to answer you. I didn’t take on my parent’s liabilities by choice. They were chucked out of their council house and couldn’t afford private rental. I bought a house for them later simply because it was cheaper than continuing to pay their rent. So there was never any chance of my parents being able to give me any financial support . I know many FIRE bloggers think children need to stand on their own two feet. Let’s just say I completely disagree.

  • 47 Ben April 19, 2019, 12:18 am

    They say you’re born short one house. That being the case you have a net position of zero houses once you’ve bought one.

  • 48 Natatafalie April 19, 2019, 7:05 am

    Are the results deliberately showing as 52 / 48? Wondered if it was a subtle Brexit dig

  • 49 The Investor April 19, 2019, 8:38 am

    @Natatafalie — It’s an uncanny coincidence!

  • 50 Jonathan (a different one) April 19, 2019, 10:20 am

    The question is live in our life. My mother has just died and I am an executor. I think HMRC would take a dim view if I ignored the value of her house on the inheritance tax forms, just because I read something on the internet saying it wasn’t an asset.
    But at the same time, my wife has just taken the plunge and retired. To get to that point there have been lots of calculations about financial needs and whether we had appropriate levels of assets. Those didn’t include our house as an asset, but they did tacitly take into account the reduced outgoings because we own it (I paid off the mortage with the 25% tax free sum when I retired). In just the same way we took into account the fact she will get a state pension from age 67 without valuing that as an element in our assets.

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