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.

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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.

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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.

 

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