The first question is a tricky one in a number of different ways. Traditionally when we ask this question about assets what we mean is how much could you buy or sell it for, and if you’re looking at other liquid assets like shares then you can just look it up on google or whatever sharetrading platform you use and it will give you a pretty up to date price. Shares are fungible and there is more than enough volume in any of the major ones that any retail investor can buy or sell as much as they want effectively. Houses on the other hand are not fungible and they don’t change hands every year let alone every day. So what’s a house worth, and should you include it as part of your net worth for FIRE?
Looking at what you could sell your house for, valuers will take into account all sorts of attributes but basically if you look at what comparable size houses on comparable size blocks in your immediate area recently sold for you’ll get a ballpark figure. Obviously there are lots of other factors that go into it, but that will get you a rough figure and at the end of the day you would have to actually sell it to find out, which presumably you don’t actually want to do!
Another way to think about the value of a house is that theoretically at least most investments can be valued as the present value of their future cash flows, should a house be thought of as the present value of the future cash flows (rent) that you don’t have to pay out perhaps? That makes sense up to a point, but then you what are those future cash flows?
It’s also not uncommon to simply value your house at what you paid for it. Most of the time this will undervalue your property, but if you bought in the wrong place at the wrong time like a number of the mining towns in the boom then it will actually overvalue it. Either way it’s almost certainly not giving you an accurate valuation, but then neither are any of the other methods!
Hopefully all of this illustrates that there isn’t just one way of looking at what your house is worth, there’s a lot of different methods and what one you use will to some extent depend on your strategy in retirement.
Looking at it from a FIRE perspective though, should you include your house in your net worth? It’s not an asset that produces any income for you although it does mean that you don’t have to use any of your FIRE income to pay for a place to live, on the flip side there are also extra expenses like council rates, maintenance and house insurance which need to be taken into account. On a net basis it almost certainly reduces the amount of money you will need to live once you own that house outright because you no longer need to fork over money for rent, but you will still have all those other expenses I mention above.
Owning a house is certainly not helping you with any of your other fixed living costs though, it’s not putting food on the table or petrol in the car so you will definitely need other assets to hit FIRE. So if you’ve got a house that is worth a million dollars and it’s fully paid off but you have no other assets, then even though you’ve got a net worth of a million dollars you’re not exactly too close to FIRE unless of course you sell the house and rent, or downsize.
And the tradeoff is that if you bought a house you’ve had to spend more time working to pay off your mortgage so it may have delayed your retirement as well, although if you need to factor rent into your living costs in retirement then that will definitely increase the amount of money you need so perhaps not. The math on it is going to be different for each individual person.
An additional problem is that a house isn’t divisible. If you own 500,000 shares of a publicly listed company and they’re trading at $1.00 each, you can sell 50,000 of them if you need $50,000.00. If you have a house worth $500,000, you can’t sell a room to get that $50,000.00, it’s an all or nothing prospect. So if you’re planning on depleting your capital over time when you hit FIRE, well that’s going to be a problem when you get down to nothing left but your house!
If you own your own home perhaps the most important considerations from a FIRE perspective is whether you plan on ever selling/downsizing your house and how much less income you need because you don’t need to pay rent. This generates a lot of additional questions!
If you’re planning on selling, how much money are you likely to get from that, would you need to draw down on that over time or would it generate enough that you don’t need to do so, and what amount of rent might you need to factor into you living expenses now? If you’re downsizing it raises much the same questions except that you’re getting a smaller payout because you have to buy a new house, but on the other hand you don’t need to pay rent.
If you’re not planning on selling or downsizing then that makes it all a bit simpler obviously, but you may have had to delay FIRE while you paid off your mortgage although perhaps not as you don’t need to have saved as much as you don’t have the big expense of rent in retirement.
Personally I include my house in my net worth at what I paid for it, but as I don’t plan on ever selling it or certainly not for a very long time (20 years plus) I exclude it from my calculations as to how much I need for FIRE.
How do you value your home, do you include it in your net worth, and how do you think about it for FIRE purposes? If you liked this post and would like to read more like it then please subscribe using the link on the right!
I include the value of my home in my net worth as I’m using Debt Recycling to help pay my mortgage down faster (I also include the cost of the mortgage too).
I’ll probably continue to keep the equity loan once I’ve paid off the mortgage as a way of accessing the equity in the property, rather than it sitting there doing nothing!
There’s a lot of positives in having a fully paid off home but it’s certainly an asset you can use as security for a loan if that’s your preferred path!
Interesting – I got some comments on my first ever net worth post and copped some flak for including my mortgage on the FIRE number but not the house! I thought this was being conservative but I guess every person sees it slightly differently!
There are plenty of different ways to think about it that’s for sure!
I am not including my mortgage in my fire number. Currently plan to live in the house for next 20 years. Paying extra off the mortgage to pay off my 30 year loan in 5 years. Then using that extra money as well as the mortgage payment for investments.
If you’re going to have your mortgage paid off it makes sense not to include it in your FIRE number because it won’t be an issue then. Great plan on getting the house paid off early and then putting the extra money into your investments!
I count it as part of my net worth, but net worth is completely irrelevant for early retirement purposes (as you point out). I see my house in the same way I see my super — not relevant for early retirement but nice to know it’s there as back up.
I count my house in my net worth, and use the estimator on real estate websites for an estimate of its current value (update it every 6 months) But I don’t include the house in my FIRE number as I don’t plan to sell it, and also don’t include the mortgage expenses as I don’t plan to still have a mortgage when FIREd.
Our house is in a new estate and there haven’t been that many sales yet so the real estate websites don’t even give an estimate of what it’s worth. Looking at nearby houses that have sold it has definitely gone up in value, but we don’t plan on selling for a very long time if ever so it’s kind of irrelevant for us.
I personally don’t own a house – however am still well progressed on the path to FIRE.
I think you can do include or exclude the house in your net worth calculation as long as you do the following:
– Include the house and the implied rent you would get in the market – say its worth 1m and you could rent it out for $20k per year net of expenses. Using this example you should increase your net worth by 1m and your yearly spend by $20k – this allows you to understand the consumption implied in the house. It may also help you consider if you are overcapitalising on your own housing.
– Exclude the house and don’t include any housing costs in your FIRE number.
Both approaches are appropriate in my view – however prefer to include the value of the house and implied rental cost.
I think another element of the above question is leverage and your own consideration of portfolio risk. As many would understand it is inherently risky to hold more than 20% of your net work (portfolio) in one asset – let alone 70-80% which many people do with one property (somewhere in one suburb in this country we call Australia). Additionally, most properties people hold have a significant mortgage on them – amplifying the gains and losses associated with property price movements. Within the Australian context this has been significantly up over the long term, however it wouldn’t be unreasonable to think what an American style housing bubble bursting or Japanese deflation could do to your net worth over the medium term if you are unlucky enough to be hit by it – quite a significant destruction of hard work and time to reach your FIRE goals.
Hi J! Yes there’s certainly nothing stopping people from hitting FIRE without owning a house, it does mean though that a fairly large amount of your required income need is going to be variable in nature and potentially subject to big rises if rents go up for whatever reason.
I think most people who are planning on having their own home in retirement are planning on having it paid off before they do pull the pin on work, but along the way the leverage certainly can cause problems.