Should You Include Real Estate In Your Net Worth?

Real estate net worth

One of the most heated discussions of personal finance is whether or not you should include real estate in your net worth.

I can already now say that my short answer is: YES! You should include real estate in your net worth, but only to some extent.

First of all, you have to differentiate between your primary home and real estate investments (the latter in which you do not live yourself, but most likely rent out) because the methodology differs.

How to include your primary home in your net worth

I know some internet warriors will disagree with me on this one, but I sincerely believe you should include your primary home in your net worth.

However, it is important to avoid a few pitfalls in doing so.

If you recently bought a home for 300,000 USD and have a 200,000 USD mortgage, then the amount to include in your net worth would be 100,000 USD.

If you bought a home five years ago for 300,000 USD and have a 150,000 USD mortgage, and the market value of your home is now 400,000 USD, then the amount to include in your net worth would be 250,000 USD.

Why should you do this? Because your primary home is part of your assets and your liabilities. It is not only part of them, but it most likely makes up a large share of them. Therefore, it should definitely be included in your net worth – not including it would not give a realistic picture of your net worth.

It is of course important to note that there’s a big difference between liquid and illiquid assets. While your real estate is an illiquid asset, (parts of) it can be turned into cash if you sell your home.

Every month you will see me reporting our net worth including real estate. I use the market value of our apartment based on an external (pretty accurate) source’s frequently updated estimate.

Some people argue you should only count income-generating assets as part of your net worth, but I disagree with this. Your home is a massive asset and should therefore be included. Should you then include furniture, jewelry etc. as well? Theoretically, you might, but I would say no, that is too much of a hassle to keep track of, but if you sell it and turn it into cash it should obviously be included.

A couple more things to consider:

  1. Your monthly mortgage payments should only in some instances be used to calculate your savings rate
  2. All of your home expenses should be included when calculating your FI number
  3. Only the potential amount you expect to realize when selling (e.g. if you downsize, shift from owning to renting or your home has risen significantly in value compared to the next home you will buy) should be included towards measuring progress on your financial independence goals
  4. … and if you sell your home and start renting, remember to take your new monthly housing expenses into account when calculating your revised FI number

How to include real estate investments and rental properties in your net worth

Ah, this one is much easier! The answer is YES, YES and YES! Of course you should include real estate investments and rental properties in your net worth.

They generate an income (hopefully!) just like your other investments and should naturally have a seat at the net worth table.

The most important part is to include both sides of the equation to give a realistic picture of how they impact your finances.

Remember to include both the market value, income and expenses when calculating your net worth, savings rate, financial independence number and progress.

Your turn: What do you think? Should you include real estate in your net worth?

8 comments

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8 comments

steveark March 8, 2019 - 05:43

You don’t even get to ask the question. Net worth has an absolute definition that you don’t get to alter to suit your preferences. It is the sum total of all the positives, the values of what you own, minus all the negatives, what you owe to others. Period. Saying you do or don’t count this or that doesn’t change the fact that there is only one correct value for your net worth. Sorry, but it isn’t up to you, it has already been decided.

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Carl Jensen March 8, 2019 - 06:53

Of course I can ask the question, Steve 🙂 and it seems like your definition aligns well with mine.

Many people ask the question and you know as well as I do that the reason is disagreement over how to use your net worth with/without real estate towards calculating whether you are financially independent or not.

In a black and white world, there might be a theoretical encyclopedia definition of net worth, but in practice, things are not always that straight forward 🙂

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Steveark March 8, 2019 - 14:03

I just let my inner engineer out of his cage for a minute and he’s just got to be right! I think we need another “worth” or maybe several because we all use net worth to represent several ideas. There is liquid net worth, what you can convert to cash within a few days, there is your portfolio net worth, your invested assets. Then there is the technical net worth, the value of your estate. Except even then it still doesn’t count pensions, insurance, etc. I still maintain net worth has a strict definition but it also has many meanings in common usage, so you are correct and I was being pretentious.

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Carl Jensen March 9, 2019 - 16:56

I fully understand, Steve – and technically, you are right 🙂 I agree we need “several net worths” – that’s why I divide mine into liquid and illiquid.

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Nick @ TotalBalance.blog March 7, 2019 - 22:01

Do you factor in the cost of liquidating your illiquid assets, when you count your home equity in your net worth? 😉
Selling your apartment in Copenhagen will cost you DKK 100.000+ (unless you sell it without employing a realtor – then it’s only 1/4 of that). Subsequently, it will cost you roughly the same amount to purchase a new (presumably downsized) home, provided that this is your game plan.

I do believe to some extend that it’s fair to count your equity in your net worth. You could view it as a form of an illiquid savings account (provided that you pay down your mortgage each month/quarter).

The problem that I have with it (and the reason why I don’t include it in my Total Balance), is that by including it, you assume that you will (eventually) be able to access the full amount at one point – which can only be the case (after you’ve paid a realtor to sell it) if you choose to move into a rental afterwards. Even if you choose to buy a cheap(er) home, you will not have the full equity left in your pocket. – So one should leave a margin (say 10-15%?) at least to pay the realtor 😉

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Carl Jensen March 9, 2019 - 16:52

I actually don’t factor the realtor costs into the equation, but I suppose it would be even more accurate to do so (although it is uncertain how I will sell the apartment in the future). In theory, you could also factor in future price increases if you want the real picture of your net worth at a given point in time (e.g. when you want to retire). That being said, I prefer to keep things simple even though it might not be 100% correct 🙂 I believe it is important to include in your net worth as it is technically your net worth, but you just have to be aware that it is illiquid compared to other types of “savings”.

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Crone April 10, 2019 - 09:19

Nick,

Would you then also discount value of stocks, since you have not paid taxes and brokerage fees that will be incurred if you liquidate them?

Your costs of selling/buying also vary, if you fx. buy with 100% cash – there are no costs for financing and mortgage, filing of debt etc.

The full value of your assets can also be borrowed against, and if the lenders do not count in transaction costs – neither should you 🙂

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Nick @ TotalBalance April 10, 2019 - 11:04

That is a good point! – The short answer is: YES, you should! 😉
However, not many people do (including myself – I don’t currently have stocks though).

I guess it all depends, how accurate a picture you really want. Let’s say I buy a bunch of stocks now, and wait for their value to appreciate to a certain amount, and then proclaim that I’m FI, without actually accounting for the tax (or the liquidation costs – if we use our equity as an example instead), then it would provide a false basis, wouldn’t it?

EVENTUALLY, you’re gonna have to account for tax and liquidation costs – you might as well do it now (although it WILL make your road to FI longer, unfortunately 😛 ). This is also why I believe in deferring tax for as long as possible 😉

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