In a cash flow analysis, you do have to include the service costs of the mortgage, but you can exclude the rent that is consequently not there.

Simple and accurate.

The second you wish to move to a cheaper place or switch from owning to renting then you can “book” the equity.

Yep, I’d rather be the guy with no savings and 500K in equity than the guy with $50K savings and a million dollar house with $0 equity.

Teaspoon

I think I started some of this debate when discussing my financial position with FT over at MDJ.

My point was almost exactly what Boydboy was saying, in that I don’t think you should include your personal residence when calculating your net worth for retirement/income purposes.

This view came about when talking about the size of portfolio you need to generate the income you want in retirement.

I also include my PR in my balance sheet, but at the price I paid for it, not inflated to what you think it is worth. Unless you are a real estate agent or a certifed appraiser, we are all in for a little shock when it actually comes time to sell.

Good debate though.

Q

If you look at the liquidity aspect of your net worth, one’s must not include his pension plan either. In fact, you can sell your house and technically get your money back within 6 months. However, you can not withdraw your full pension plan in one shot at any time (not in Canada).

However, the argument AGAINST including your home value doesn’t disagree with this, what it says is that from a personal finance point of view your liquid net worth is much more important.

For instance, if two people each have net worths of $1 million, Person A has it all tied up in his house, while Person 2 has it all in cash. Which one is in a better position? Which one has more options?

I don’t include my primary home net worth in my calculations, and because I have positive equity in it I don’t include the liability either. In your first example you make the mistake of saying the guy would have a negative net worth of -200k if he didn’t include his home. The idea is that he doesn’t include any of the positive equity.

While you own your home it is in fact a liability, you have loads of expenses associated with it and you make no money back from it.

A lot of people have inflated views of their own net worths when they include their home equity. In a place like California or New York a typical middle-class person can easily have a $1 million home, its extremely common. But unless they were to move to a low cost part of the country they can never take advantage of that built up equity. And the fact is most people will never want to move from the major metro areas to podunk places.

My home is worth about $1.2MM and we bought it for $700K in 2001. However, unless we move to a much smaller place that extra equity means nothing. And why on earth would we move to a smaller place when we are just starting a family? We have less than $500K left on our mortgage so our equity is around $700K. I have net worth outside of this of also around $700k. So can I say my net worth is really $1.4MM because of the home equity?? It sounds nice. Makes me feel a little bit rich. But its not real. The home equity is nothing I can touch. The other $700K I have in cash and investments I can use anytime I want. That is the real money I would live on if I had to, if I wanted to splurge, that would be the real money I could use for something. Say I want to buy a boat for $100K. With a net worth of $1.4MM it sounds like it isn’t a big problem, but in reality it would be a big chunk of my liquid assets. So I consider the latter number more important.

In conclusion, both numbers are important. Including your home is important for a complete picture and a super “emergency” type situation. Not including your home is important to get a picture of your real financial health and what you’re worth is barring any emergency.

You are totally right. Every year, when I calculate my net worth, I drop my car value. The easiest way to do it is to find a similar car to sell on the internet and put a lower value than the asking price.