By Dan Miller, WCI Contributor
Buying a home is a big deal—it’s one of the biggest and most emotional financial decisions you’ll make in your entire lifetime. Haven’t we all dreamt of the home we’d buy when we grew up? While a home is an asset, depending on how you look at it, it may or may not be a true asset that should be included in your net worth calculations.
What Is Net Worth and How Do You Calculate It?
At its simplest, your net worth is the sum total of your assets minus the total of your liabilities. Assets may include the balance in your checking and savings accounts, your retirement accounts, and any other investments. Liabilities might include the balance of any student loans as well as other loan balances, like mortgages and car loans. When you sum your total assets and total liabilities, your net worth is the difference between the two.
It is possible to have a negative net worth if your liabilities exceed your assets. In fact, many physicians start out with a negative net worth when they do not have many assets but have medical school loans with a six-figure balance. Ideally, you should work toward always improving your net worth over time. It's a good idea to focus less on comparing your net worth to others and instead focus on making sure that your own net worth increases over time.
More information here:
We’re (Finally) Broke! Why Being Worthless Feels Amazing
Should You Include Your Primary Residence in Your Net Worth?
Generally, the value of real estate that you own is included as an asset when you calculate your net worth. However, most people don't really treat their primary home like an investment property.
When you own an investment property, everything is about the numbers. What kind of cabinets would allow you to maximize the rent? Would re-doing the countertops increase returns or just be a waste of money? What’s the cap rate, the gross rent multiplier, etc? These aren’t the same kinds of questions that occur to you when you’re picking out paint samples for your child’s nursery or renovating your dream bathroom.
Let's look at some of the arguments both for and against including your primary home in your net worth calculations.
The Case for Including Your Primary Home in Your Net Worth
The simplest explanation is that any other real estate that you own would be considered part of your net worth, so your primary residence shouldn't be any different. There's certainly an argument to be made that your home is an investment, so it should be counted as part of your net worth along with your other investments.
If you do include the value of your primary residence in your net worth, make sure that you also count the balance of your mortgage as a liability. It's really only your home equity that would count toward your net worth. And unless you are planning on selling your home by owner when you move, you may want to discount your home's value by the cost of any realtor commission that you'd have to pay to sell.
The Case Against Including Your Primary Home in Your Net Worth
The case against including your primary home in your net worth is that most people typically don't treat their primary residence the same way they treat other investment properties. Owning a home also means that you have recurring liabilities, such as a mortgage payment, utility payments, repair costs, property taxes, maintenance, and more. While owning a home still might make financial sense, this can be a valid reason to not include it as part of your net worth.
Another way to think about this is that once you retire and/or reach financial independence, you still “have to live somewhere.” This means it may not be appropriate to count the value of your living space in your net worth. This line of thinking says that it's not appropriate to count your home equity in your net worth since you can't count on that to reach your FI number.
One thing to keep in mind is that when it comes to qualifying as an accredited investor, one of the criteria is that you have a $1 million net worth excluding your primary residence. Qualifying as an accredited investor can open up a huge world of investment opportunities, including great real estate crowdfunded deals. If that is something that is important to you, it may make sense to keep the value of your home separate from your net worth.
More information here:
2024 WCI Annual Survey Results: Here’s Your Net Worth, How Much You Make, and Your WCI Criticisms
The Bottom Line
Your net worth is calculated as the difference between the value of your assets and the sum total of your liabilities. For many people, the home equity in their personal residence can make up a significant percentage of their overall equity. All other types of real estate are included in your net worth calculations, so the simplest answer is that yes, you should include the value of your primary residence in your net worth. However, there are other arguments that say you should not count it since you'll always need somewhere to live.
So, should you include your primary residence in your net worth calculations? The best answer is that it's really up to you. There isn't a hard and fast rule about which way to do it is “right,” so you have some latitude to make your calculations however you feel is best.
The White Coat Investor is filled with posts like this, whether it’s increasing your financial literacy, showing you the best strategies on your path to financial success, or discussing the topic of mental wellness. To discover just how much The White Coat Investor can help you in your financial journey, start here to read some of our most popular posts and to see everything else WCI has to offer. And if you're inspired to build a sturdy financial foundation, make sure to sign up for our WCI 101 email series.
Completely agree. Though this is definitely a controversial topic.
I’ve taken one of two approaches.
1) Adding the fair market value of the home to my assets and the remaining mortgage left in the liabilities
Or
2) just listing the difference between the fair market value in my assets and leaving my mortgage off completely in my liabilities.
I use number 2 in my net worth calculations for my site, which I will do every quarter (have done two in the first six months).
TPP
I keep my net worth without my home and my net worth with my home as separate numbers. I consider my main net worth to be the one that does not include my home, simply because I never intend to sell my home, ever. I’m near Washington DC, and you would have to know the strength of the DC Market to know that it’s only going to keep going up. It’s the wealthiest area in the United States, with the best job market in the United States. I can already rent it now for twice my mortgage, and when I move away for full retirement which won’t be too long, it will be a huge income producer. The DC area is very expensive, but if you play your cards right it has many advantages too.
Prices in the District keep going up because government keeps expanding.
I can see both sides, but think the issue is in many ways a distraction from the important point, which is cash flow. $1 million in a house is not the same as in a taxable account, a 401k, or a Roth. Even discounting net value, the impact is how much the asset generates or avoids after taxes. That is, a paid off mortgage avoids rents and mortgage payments. To me that is a more useful way to think about it than how much the house adds X to my net worth.
Just a quick suggestion- even if these are old posts, I would recommend scanning to ensure the appropriate use of words such as “liability” when “expense” is really meant. Liability has very a specific meaning in financial contexts…
Keep up the great work!
Someone’s home should indeed be included in their net worth calculation. Almost all financial professionals will include this. Including banks and such. Of course excluding the accredited investor calculations. (Note: being an accredited investor is a bit overrated anyway. As one myself, with a number of startup investments, I’ll say you really need to be willing to never see that money again. Exits are much fewer and farther between than they were 10 years ago.)
Why include the house in net worth? Well, if you decide to downsize someday, like we did, then obviously that extra cash is part of net worth. So why not include it even while it is “invested” in the house?
Now, whether a primary residence is a good investment or not, “it depends” for sure. 🙂
In the financial planning process, we usually leave out at least part of home equity, assuming that even with downsizing-a family has to live somewhere-and preferably without debt. So for example, a retiring physician has a paid off home worth 1M dollars. It’s unlikely that the family will leave somewhere less expensive anytime in the near future, so we would not count any of the home equity as an asset that can be used in retirement. In fact, the cost of a more expensive home just increases the need for funds from other sources to maintain it. We figure about 7-8% a year of the fair market value of the home covers the “cost of money-borrowed or not”, insurance, repairs, deferred maintenance (A/C, roof, etc), and property taxes.
However, some families we work with own homes that are much more expensive and downsizing is a legitimate possibility/probability-which would free up funds for retirement spending.
Finally, we do consider significant home equity as a safety buffer-in that a reverse mortgage can always be used to tap it.
I definitely think it’s appropriate to be aware of both your net worth with and without your primary residence. It can give you sense of just how “house poor” you are. If your net worth virtually disappears with the removal of your primary residence, you’re probably over leveraged in your home or living too far above your means.
For physicians, this is common in the early years. Not a lot of cash in the stock market yet, but we’ve already bought a home and likely needed a big mortgage to buy it. As we progress, we should see more and more of our net worth in stocks/bonds/other investments category and a smaller percentage of it coming from equity in our home.
So, my answer is to know both numbers and see how they are changing over time. However, your actual net worth is, by definition, all of your assets minus all of your liabilities. So your primary residence absolutely should be part of that calculation.
I personally leave my home off my net worth calculations. I do so because you really don’t know what your home is worth until it is actually sold. Anything before that is just a guess (similar to those storage war shows where they inflate how profitable their storage locker buy was by throwing out a number they would sell it for).
My home is particularly tricky because it has a water feature that makes getting an accurate comp value impossible (and I feel highly undervalued using tools like Zillow (if you are wondering what feature is it is two natural waterfalls just 200 feet behind my house (one is 45 feet tall the other 8 foot).
That coupled with transaction costs etc makes any value I assign basically a shot in the dark. I like my net worth calculation to be precise (I use personal Capital too) and just know in the back of my head that I have this fully paid asset that will bump it as well.
The Net worth I use without the house (and I don’t include jewelry or vehicles for similar reason) is more accurate for me to determine what cash flow it can provide for when I do decide to retire early (probably 53-55 range (I’m 47)).
Agreed about the cash flow with the house. Although you could argue that by the time you retire, the market could tank 50 percent and take a few years to recover, decreasing your stock cash flow if you plan tighten your belt during a bear.
How do you place value on a waterfall? I’ve been an article where they tried to place a value on a great view and rated the views by various factors. But even the most awesome 100 mile 180 degree unobstructed view only added 10% to the value.
1- In my net worth spreadsheet I count the home (and a few parcels of land, and hte cars, etc.) in with their hopeful quick turn around (2 months for the real estate, 1 week for the vehicles). Every year or so I take a few thousand off the cars (or check the sale to dealer blue book if I’m bored). I have the house at 90% what we paid for it a decade ago, knowing if it were a real fire sale I might have to settle for 60%, and it’s 70% of what we’d depreciate it for were it an actual business (the roof and floors and granite and cement might actually raise sale price, pool I hear not). Of course when we had one the mortgage was a liability.
2- Just to put in perspective for what we count net worth (us anyway- we are not the ‘Jenn Industries’ public company but the ‘Jenn and hubby don’t run out of money before we die’ family)- our ability to retire comfortably and to afford larger purchases/ bequests- my FIL just died and (having reviewed this with him and MIL last year when we weren’t expecting his loss) I had counted their guesstimated home value of $200K (doubled in 30 years) in what he or she or both could use if they needed nursing home money (were thus leaving their home) or wanted to consider a reverse mortgage or sell it to us etc. Now we actually contacted a realtor as MIL considers moving and had a ballpark of $400K, I’m counting on $300K for MIL if she needs it. (and the realtor, hopefully not just jonesing for a client and so exaggerating/ lying, gave me comps implying sale at >90% list in 1-5 months)
One COULD value home at true sale value but subtract cost of a fund that generates enough income to pay fair market rent, either in your home or the home you’d settle for if things got tough… But as with my FIL’s estate the actual home value DOES increase how much your widow and/or kids have once the dust settles if you die, and our kids would not be living in it at that time.
Steven Podnos ‘s reply makes clear that my MIL’s need for money for rent and eventually NH at 80 yo means a different value/ expected costs than hers or ours or yours at 30-40-50-60 when we might still replace our home with one of similar cost and are planning how much other money we need to save as we accumulate rather than just how much money do we ‘have’- guess the point is a home you live in is a very different use of money- barely counting as an investment if at all- than a stock or bond portfolio or even a home you rent out to tenants.
I think Jenn makes a very important point when she writes about her in-laws, that they “could use [the value of their primary residence] if they needed nursing home money (were thus leaving their home) or wanted to consider a reverse mortgage or sell it to us etc.”
For that reason alone, it makes sense (to me) to include home equity, (estimated market price less outstanding mortgage or however imperfectly it is calculated) in one’s net worth. If your primary residence is “worth” $500,000 and you own it mortgage free, should long term care be needed, that’s an asset that can be tapped (via reverse mortgage or sale) when/if needed.
One caveat–with the Tax Cut and Jobs Act, for a married couple filing jointly, owning a primary residence (or real estate generally) with property taxes of more than $14,000 per year will be less appealing going forward given the $10,000 cap on SALT (State and Local Taxes). In fact, in states that tax income and property, the $10,000 SALT cap will be even more problematic.
I include it for reasons discussed above: net worth = assets – liabilities. In any valuation, I value my primary residence (and my secondary one) quite conservatively and realize that they are not things that I am likely to liquidate anytime soon or that when I do liquidate them that it will NOT be a financial decision or free up large amounts of cash (though I suppose the secondary would though unlikely it will ever be sold in my lifetime unless children lose interest). I have never really been interested in knowing my net worth to the penny and I think there is some bias in the idea that we know what other investments are precisely worth (we know what some of them are worth today but not a week or a month from now) and that valuing residential real estate is fraught with massive uncertainty. As an asset type, I think history suggests that residential real estate doesn’t beat inflation by much, if at all, but that is not to say the for some, in some places and time frames, that their homes haven’t been fabulous investments. The idea of being an accredited investor makes me chuckle. I guess ‘whale’ is not felt to be a flattering enough term.
Sorry for the double post. That should have been ‘… will not be a financial decision…’ in line 3.
Can’t figure out how to edit comments!
You can’t. Only I can 🙂
Just curious, why not offer the feature that other blogs have that allow editing one’s own post for five minutes after posting the comment?
What’s the name of the plugin? I’m willing to try it if it doesn’t cause any other problems.
I’m not a technical person, but ask PoF- I believe he allows comments to be edited for 5-10 min after submission on his site…
I found one. Let me run it by my developer and make sure it won’t cause any problems with current plugins.
While you’re fiddling with the editing stuff, maybe look into another spam filter that’s smarter than using only keywords. I’ve probably posted 50-100+ times and it’s completely random whether the next comment will be held for moderation or not. That’s gotta eat up a big chunk of someone’s time.
It might not be a simple plug-in like Akismet. It’s been awhile since actively managing a blog myself, but a 3rd party service equivalent to Disqus might do a better job than a simple keyword filtering plug-in. I can’t imagine popular sites have hands-on moderators approving everything.
I don’t view my home as part of my networth since even if I sell it I have to pay to live somewhere. As such it’s expense and inflation mitigation instead of something in my networth.
But if you sell a home say for 100s or thousands of dollars built in equity because you have to for financial needs you will likely move somewhere that costs less. Maybe even a condo or apt whose rent is about what taxes and upkeep combined are. So I guess I’m not understanding the “have to live somewhere” argument. Especially if someone is in a McMansion with a large amount of equity let alone paid off.
Though this is an issue that only personal finance people get frothy about, it’s an interesting issue nonetheless. As stated, the most important indicator of net worth is that it’s increasing over time. I would most definitely include homes in your net worth.
For those people that don’t think your home should be in your net worth because home equity is not very liquid, then that is even more reason not to include retirement accounts in your net worth. They can be even less liquid than a home and are not an accurate representation of wealth since money in a 401k, for example, will be taxed. If liquidity is the issue, then your net worth is simply what you have in your checking and brokerage accounts.
Then there’s the question of cars. MOST people, including myself, don’t include the value of cars in net worth statements. I’m not really sure why since they are definitely easier to sell than a house and are almost as useful as one too. And it’s easy enough to find the value of a car on KBB or Edmunds. I guess I just don’t like including depreciating assets in my statement. But they are assets nonetheless.
That other issue- addressed by WCI somewhere but I forget where- of “how do you count not yet taxed assets in your net worth?” is even more important for those of us with more money in untaxed pension accounts than our home. The only thing I don’t count is my kids’ actual education funds. I even counted a loan I gave a sibling- though admittedly the repayment occurred via holding back the payment amount from the rent income on a jointly owned property not in sibling’s control! – and now a loan to my kid. So far it hasn’t been an error, but I wouldn’t bet my retirement on it.
That one is tough, but I guess I’d look at it like this- it’s your money until you have to pay the taxes so I’d count it until it is given to the IRS. Just realize when looking at retirement spending that those taxes will be one of your expenses.
Agree, WCI. PoF has some great posts on paying next to nothing in taxes in retirement even on withdrawals from tax-deferred accounts by diversifying the tax status of accounts, and then strategically withdrawing to keep various dividends/capital gains and other tax deferred withdrawals from hitting certain thresholds. So I would also count the full amount in tax deferred status because there are ways to shift that figure at the time of withdrawal (i.e. a straight 25% discount would likely not be appropriate if you approach the exercise with some research and planning).
The lower your retirement spending, the more likely you can get it tax-free or very cheap.
It’s bizarre to me that anyone gets frothy about this. Net worth has a very straightforward calculation- what you own minus what you owe. Now if you don’t want to count your T-shirt collection because it’s a pain to do so, fine. But a home? Sure. Count it. A Tesla? Sure, count it. Don’t count it when you’re calculating the assets available to support your retirement (at least until you sell it) but it’s definitely part of net worth.
Some people include furniture jewelry, etc in their net worth. I think houses and cars are significant enough to include (unless you have beater cars). I think the the net worth only tells part of the story about your financial picture. Let’s say 2 people have 1 million net worth. Person A has a 500k house and 500k in investments. Person B has a 200k house and 800k in investments (lower COLA are). I would argue that person B has more “liquid” net worth and in many ways is in a better situation.
In addition Doc B has lower fixed expenses living in a $200K home in a low cost of living area. Doc B is much much better off financially.
I track it both ways, but its really the number without the house value that is important to me as that better correlates with my “FIRE” number. When I retire the monetary value in my house won’t be realized for (hopefully) another 30-40+ years.
I use the price I paid for the house as its value in my net worth calculation, as that is the most recent actual value of my house. I have only owned my home for 5 years, but for consistency, will likely keep using this number even after owning the house for decades. This is an imperfect calculation, but I think if I am consistent, then it will meet its purpose of letting me evaluate my financial situation.
I hate using our home in our networth calculations. The value adds nothing to our understanding of our financial situation and if/when we can retire. Actually I think it skews perception and adds inaccuracy.
It’s interesting you say that your home value adds nothing to your understanding of your financial situation. To me, if our home was worth a fraction of the rest of our assets, I see that as a good thing. If our home was worth far more than the rest of our assets, and we owed a lot on it, I would feel like we were not in a good place financially.
Texas is one of the states that has a homestead exemption protecting your house from creditors. If an unfortunate malpractice suit exceeds the limitation of your insurance, your house is protected no matter how valuable As long as it sits on less than wonderful baker inside a city limit. As such, many physicians buy a lot of house. In this respect, I do consider the house to be part of my net worth
Correction, Less than 1 acre. Not wonderful baker. Thanks, Siri
So the house is available for a reverse mortgage in old age, or maybe after an impoverishing malpractice suit. Good reason to pay off your mortgage instead of pay the minimum and invest in unprotected taxable accounts instead. And buy your home as a 1 acre lot with house plus another parcel if you want a bigger spread like me. (Would they leave you the 1 acre + house or would they make you give up 80% total value if you were on 5 acres? Anyone with a house bigger than an acre = 43K sq ft?)
I checked the Alabama rules about that as we decided whether to pay off mortgage (3% return after taxes) vs max out refi and buy stocks (as our de facto financial advisor my sometimes wild and crazy brother wanted us to, maybe so that counting managing our assets for us he’d have that high roller status for his own affairs). I’d rather risk the partial loss of investment but have a place to live lifelong (generally) than small risk total loss AND can no longer afford my home AND can’t afford to retire.
From the comments, it seems like there’s still a lot of differences in the way people calculate their “net worth.” One way to get the heart of the issue is by reframing it a bit. Say that someone has been renting while they saved up to buy house. If they take $500,000 from an after-tax brokerage account that represents all of their assets and use it as a down payment on a $1 million house, did their network really drop by half a million dollars back to zero? Of course not! They just chose to move their assets from their brokerage account into real estate that they will live in, and now their net worth is still equal to their assets minus liabilities.
It seems that those that are adamant that the house does not belong in the net worth calculation are conflating “net worth” with what should actually be titled something more like “potential income-producing portfolio” (which could of course include more typical investments as well as things like investment real estate). It is this later concept that may be the focus for most folks since that portfolio of various investments is what they have to draw on in retirement. A primary residence typically doesn’t produce much in the way of income, but it certainly is an asset and (offset by any liability connected with it such as a mortgage) should be included in a net worth calculation.
Agreed. Except the “income” from your residence is best thought of as the free rent.
By comparing our home to the cost of renting a very comparable home in our neighborhood and taking into account property taxes, the difference in cost between renters’ and homeowners’ insurance, and maintenance (estimated for this purpose at 1% of home’s current value annually though we actually spend about half that much), we’re getting about a 5.5% nominal return on our home’s current value. That looks like a good investment to me.
I think you’re leaving a lot of important stuff out of that calculation.
Such as? If I included the time I spend on maintenance, that return number would come down, but I spend very little time on that.
Kiyosaki excludes the primary residence because it represents negative cashflow. Same as the car, boat, motor home, whatever.
Might as well add a third flavor of net worth: What’s everything worth in a fire sale by the people inheriting it? 😉
Over 3 mil, that’s great, you are rocking it. I have 2 separate calculations with net worth which includes things like home equity and 529s as well as retirement assets which excludes both. Personally if I didn’t include such things, I might subconsciously get discouraged with debt reduction or saving for the kids education. Total mind game.
Basically, if I still had $200k in student loan debt and $400k in home debt, all that money would likely be in some index fund. Would that make me $600k richer? I think not.
Unless your charging me 1-2% a year to manage my assts, then it’d be a $12,000/year pay cut on commissions.
I finished reading rich dad poor dad a few weeks ago. There is enough there that I had my daughter read it but I also disagree with some he says. I do think he mostly gets the house thing right. I like many others have 2 different net worth calculations that include and exclude the house. I was fortunate to buy in a lower market and our house paper value has doubled. As inflation increases and rents increase the asset side of that house increases (Ie. The amount I am paying for principle, interest, insurances and taxes will soon be less than I would pay for rent elsewhere). Also if I could convince my wife to move to a smaller house I could invest the amount we made monies the cost of the new house which would probably give us an additional 300k but that is mostly luck of when we bought. (My last house lost us 30k plus realtor fees-bought in spring 2008)
Where I really agree with rich dad/poor dad that it is a liability is on the extra costs that go into owning a house. In 7 years I have spent 24k on a new roof, 12k on furniture, 10k on other repairs, 10k to redo a bathroom and now the wife wants 100k-140k on other things including remodeling 2 bathrooms, recarpeting, redoing kitchen. That is all money that could have been invested. In short I would say a house is almost a wash for me. I agree with Jane Bryant Quinn, a reasonable house (not big) is “a security blanket”. Never buy unless you will be there at least 5 years. If you need flexibility to move, rent and you will come out better. In short I think maybe including 25% is appropriate for calculating net worth.
You might like this article:
https://www.whitecoatinvestor.com/a-home-is-an-investment/
I’d include your entire home value in your net worth but I wouldn’t include it in your nest egg.