Calculating Net Worth: What Should One Do With Their Primary Residence?

Several readers have asked me how a person’s primary residence should be used when calculating net worth. As we’re on the verge of buying our first home, this becomes a very relevant question to us for the first time, so I spent some time looking at the options:

Include the debt, but don’t include the house at all. The argument here is that if it’s your primary residence, then you’re not going to be liquidating it ever, thus it’s not an asset. For many people, this would push their net worth far, far into the hole and if you’re making interest-only payments, it’s a hole you’ll not be climbing out of.

Include the debt, but only include the equity in the house. In other words, only include the portion of the house that you could draw equity from through something like a home equity line of credit. This means that any payment directly to the principal actually counts double towards your net worth, as it decreases the debt and increases the equity in the house.

Include the debt and also include the purchase price of the house. This means that the house itself has no direct effect on your net worth upon purchase and it slowly goes up as you reduce the principal of the debt. Many people seem to follow this path because it somewhat disguises the debt.

So what are we going to do? We’re going to actually follow a fourth path, which is an interesting one.

Include the debt, but only include the assessed value of the house. This means that right after purchase, our net worth takes a small hit, but as time goes on it climbs back as we make debt payments. Plus, each time the house is reassessed, the value of that asset changes – and given the location and the quality of the house, it will likely go up. In essence, this route means we are not counting the appliances as assets in any way, nor are we considering some of the more aesthetic appeal of the house that isn’t directly affected by the tax assessment.

What this means is that in the short term, my monthly net worth calculations will look disastrous, with some big losses, particularly in the month where we sign all the papers and take possession of the house. After that, however, our net worth will begin to climb again, albeit at a slower rate than before because our housing payments are going up. Then, whenever our home is reassessed, our net worth will likely see a bump (even though that also means that we’ll be paying more in taxes, which is a downer).

I would recommend that others follow the same path as well for including the primary residence in calculations. It is an asset and can be liquidated, but the aesthetics of the house and the appliances within and so forth will often make some difference in the actual purchase price that may only be of value to you.

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