Net worth

CFA General
#221

some of you guys are nuts. of course you include home equity in net worth. i’ll give you a real world example where i’m from.

the cost of a house in my neighborhood is ~$800,000. if i own that property outright, i pay taxes of $5,000 per year. to rent this home would cost me $42,000 per year. to maintain the house in line with how a landlord would otherwise maintain the property, and ensure that my house does not depreciate in value, i would need to invest about $8,000 yearly. for argument sake, to be extremely conservative, let’s assume no inflation for any of these figures. all utility costs are the same whether i rent or own.

so my cost of renting is $42,000 per year and my cost of owning outright is $13,000 per year. oh great CFAs of AF, please calculate the present value of $29,000 per year in perpetuity. i’ll help you. assuming a discount rate of 5%, the value of owning over renting is $580,000. the thing is, because the return is after-tax and real estate is a low risk investment for long-term owners, a more proper after-tax real return goal might be closer to 3%. using a 3% discount rate, we get $967,000. these numbers are fairly close to the cost of the house are they not? hmmm. this is first page in level 1 folks.

#222

Wow, MattLA, ya nailed it. And you’re a charterholder?

#223

I have two thoughts on this.

  1. I wish property taxes were that low where I live

  2. Thanks, this is a much clearer way of putting what I was originally saying when I said “If you’re going to not count home equity in the net worth of a homeowner, you’d have to somehow subtract the present value of expected rent payments from the net worth of a renter.”

#224

Did you not understand that he was completely disagreeing with you, or have you now changed your mind?

#225

Not necessarily disagreeing with all the analysis that followed, but the sum of the cash flows is not the same as home equity.

So you basically said, “Home equity is included in net worth”, then went on to prove a totally different point.

Of course a paid-off house is better than a not-paid-off house. That’s not the question.

#226

Can we also include tax deductions, mortgage repayments and lost opportunity cost of downpayment.

#227

are any of you guys client portfolio manager or financial advisor of some sort? What do YOU guys really tell your clients? Some of you really tell them that even if the house is fully paid, nah don’t add that to your net worth bud that is “gone money.”

Net Worth = Asset - Liabilities

So a house costs 100k and you have 40% equity in the house. Let’s do accounting 101.

Net Worth = 100k - 60k

Net Worth = 40k

So yes, you should include your equity portion of your house.

#228

Question - how are you going to access that equity? I mean, any asset is only worth what you can monetize, right? (At least in the financial sense.)

#229

Yeah, I was thinking the same thing. So its not the cost of the house but the market value.

#230

#HomeEquityLoan

#231

^ But isn’t that 180 degrees opposite of the “value” created by owning your own house, a la Matt’s analysis?

So you’re saying that in order to create value (by monetizing your house) you have to destroy value (the future cash flows that you have given up by monetizing your house)?

#232

I am not into redefining words in our finance and accounting books or “what if that what if this” Asset is defined as “property owned by a person or company, regarded as having value and available to meet debts, commitments, or legacies.” It is your money and you have access to that money. It is a long term asset.

Net Worth = Asset - Liabilities

So a house costs 100k and you have 40% equity in the house. Let’s do accounting 101.

Net Worth = 100k - 60k

Net Worth (Equity) = 40k

We should look at what CFA material has to say about this

#233

You asked for a way for homeowners to access their home equity, correct? Obviously the banks think it’s worth something…

#JusSayin

#234

Is that any different for any other asset you or anyone else owns? If you sell it, you stop reaping the benefits of owning it.

#235

rofl i’ve been saying this 3 pages ago.

#236

yup. not sure what the problem is here. What’s next? companies should not include equity portion on buildings and land they own from Equities and to stay consistent take out the value of the land/building from Asset and any mortgage/loan from Liabilities? LEAN out them financial statements!! lol

#237

Same… KISS principle applies here folks…

#238

Also don’t include the value of equipment that is necessary to producing your company’s core products. Your company has to keep making those products to meet demand, so how could you tap into the equity in that equipment?

Obviously PP&E has no value and should be left off the balance sheet.

#239

lol

#240

the PV of savings due to owning a house outright and the market price of the house are not unrelated. me calculating the PV is simply to show that the market price of the asset isn’t created from thin air. the market price or an appraised price is a more accurate representation of what the public is willing to pay for this PV of savings. we can think of the market price as being anchored to the PV of savings over a long-period of time but that the market price can deviate greatly from the PV of savings at any given time for a variety of reasons.

i’m a financial advisor and of course we include home equity in clients’ net worth. we are conservative estimating values when prices rise rapidly. at the end of the day, the home equity number doesn’t mean much and it only really is discussed in the context of estate planning. you need to know how much they have to access should they be 90 and need to go into a nursing home.