Updated on 05.22.07

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

Trent Hamm

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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  1. Hazzard says:

    I include the fair market value of the house minus costs to sell it and also include the mortgage debt so I’m only counting the equity towards my net worth.

    I think this is the way that many people track their net worth. I like to know exactly what I’ve got. If times got tough, it’s nice to know I could make lifestyle adjustments (including selling our current home) in order to make ends meet.

    I don’t value my house at the price I’d like to get for it, I simply track our local real estate and compare similiar homes for sale. I’m also a little more conservative and put the value lower than the latest sales. Basically, it’s a bit of an estimate but it’s a conservative one.

  2. alex says:

    That’s a good point Hazzard, I have been forgetting to subtract the ridiculous 6% real estate commissions, which amount to $25K for my house, though I would never give a realtor that much money for doing very little.

  3. Rick says:

    Taking your house into account really increases the complexity of valuing your net worth. I believe you should take your house into account, because you can sell it (liquidate it) and move back into an apartment; you can also take money out of the equity in your home (albeit at a cost).

    Hazzard recommends subtracting the selling costs. This could be a sticky point, because you don’t HAVE to have any selling costs. At the very least, you could eliminate your selling agent’s commission by selling by owner. I am not an accountant, but I personally don’t include any selling costs in my calculations.

    Finally, Trent recommends using the assessed value of your house. I disagree slightly, because the assessed value doesn’t always equal the market value. I just bought my house for $165K, but it is assessed for property tax purposes at $169. If I resold it today, I don’t believe I could get the $169. I think I would be able to sell it for the $165 I paid for it.

    So therefore, I am using Trent’s methods, of using the assessed value rather than the purchase price, but rounding down the value just a little bit to be on the safe side.

  4. GeekMan says:

    Trent, I’m having trouble following your logic of using the assessed value of your primary residence for debt calculation instead of the current market value. Perhaps this is because I live in a large city where most homes are coops or condos in apartment buildings and their assessed valuations are always exceedingly lower than real market value. For example, one apartment I lived in a few years ago was assessed a value of $35K the same year I sold it for $615K, which was two years after purchasing it for $435K. Keeping this in mind, how would using it’s assessed value have had any meaning whatsoever in calculating my debt? In this regard I agree with Hazzard’s methods and have been using those calculations for years. I include all the debt (including mortgage, HELOCs, sell/buy fees and other costs) and also the LOWEST current market value of the home based on area sales (updated yearly). Perhaps things are different in your area, but after owning several homes myself and speaking with many friends and family around the country who own their own homes, I have yet to see the assessed value of a home accurately reflect the homes current market value. This is especially true for at least a year after a homeowner does renovations.

  5. Ace Davis says:

    I too use the assessed value minus the loan balance. True, this is partly due to convenience, because it’s not clear-cut what a house will actually sell for at any point in time. I can’t see not including home equity at all, because it’s a real (forgive the pun) asset that will impact your future housing decisions (and perhaps also things like college financial aid eligibility).

    It’s worth noting that if your assessed value becomes way higher than the actual market value, you should be able to challenge that assessment and lower your property taxes.

  6. Ted Valentine says:

    The simple way is market value minus amount owed on all mortgages. This is more a “gross worth” in my opinion, however.

    The more accurate way is market value * 0.85 minus balance on all mortgages. The cost of selling the home, fix-up costs, and moving expenses to be about 10 to 15% of the value of the home. This is what you can expect to “net” from your home sale.

    The hard part is getting the market value right after you’ve been there a couple years. I check recent neighborhood sales of comparable houses on my own for an estimate. If you know a realtor they could do a quick market assessment for you if they’re nice.

  7. k says:

    Ditto GeekMan’s question. My assessed value is about $30k lower than market value for a house of my size, style, and area–and that’s not even taking into account the fact that mine has more finished space, an extra bath, and other unusual but value-enhancing features when compared with those other houses. I’d rather guess at the low end of market value because it’ll still more accurately reflect the amount I could wring out of the house in a crunch.

  8. sd says:

    I calculate it similarly – I include the debt, and I include a very conservative market value on the house.

    Our assessment (in Denver, Colo.) just went up, in a year when the local newspaper just wrote an article about how many people are complaining about higher assessments. Yet the assessed value is about $20k lower than a conservative market value for our home. In my net worth calculations, I use an amount that essentially follows Hazzard’s guide, I suppose – or a “fire sale” price where, if we had to sell our home tomorrow, I know we could get that price almost immediately. That way I can be assured that I’m not overestimating the value or our net worth.

    Including only the purchase price doesn’t make a lot of sense to me — what about equity that builds over time? We bought our first house at a “bad” time in a not-so-desirable neighborhood, and yet our sale price was $50,000 higher than our purchase price five years earlier. In our starting-out phase of life, we don’t have a lot of investments that provide a nearly 30% return in five years, and tax deductions in the meantime, and it wouldn’t make sense not to include that in our financial snapshot.

  9. alex says:

    If you go For Sale By Owner, you will generally get less for your house, as buyer’s tend to take the extra money the seller is receiving into account, when constructing an offer. The lower sales price might still save you money, but generally it will be lower than the price you would get if you had a realtor.

  10. Hazzard says:

    I think either way (assessed or market value minus selling costs) are both reasonable. The main thing is to be conservative on the numbers. It doesn’t make a lot of sense to inflate the number at all. I tend to take a “worst case” approach to valuing items like my house and cars. I don’t include any other personal items in my net worth calculation at all. I’ve seen others include all kinds of items like couches, barbeques etc, but that doesn’t really make sense to me. The whole point in me tracking my net worth is to be sure that I’m making good financial decisions to make the number go up. Any money I spend on personal/household items just falls right out of the equation.

  11. Ben says:

    I use the price I paid for the house as the value of the asset, and subtract the amount of my remaining mortgage.

    For my situation, this is the most conservative way to do it without entirely writing it off. The assessed value of my house is about $100k more than my purchase price, but I doubt I could get that for it today, but I guarantee I could get at least my original purchase price back.

  12. I don’t own a home, but I would use… appraisal value of the house minus the loan amount left unpaid?

  13. plonkee says:

    I’m buying my first house and I’m going to use a conservative estimate of current value taken from the selling price of other identical houses nearby and minusing about £5,000. We don’t have annual assessment for tax here – every property in the country was last assessed in 1991.

    I’ll then subtract the mortgage value, the repayment penalty (if appropriate) an estimate of the costs of sale and the cost of purchasing it.

  14. PJA says:

    I think accountants might put the house in a fixed asset category (along with cars, books etc). The value is what you would likely get for it after sales costs (including clean up prep). Debt goes into another category. Presumably net worth is the current market value of liquid assets (e.g. money market, stocks etc) + current market value of fixed assets (what they would sell for after sales costs, not what you paid) – debt.

  15. Matt says:

    I use the purchase price of our house minus the outstanding mortgage Over time this tends to understate our net worth, but net worth isn’t an exact science anyway. For example, we have $370,000 in 401K accounts. We include that full amount in our net worth but the reality is that since we will probably pay taxes when we withdraw the money the accounts may actually be worth less. Since it would be impossible to accurately determine the effect of taxes on the accounts, we just use the full amount.

    What really matters, and Trent has made this point before, is the rate at which your net worth grows. It’s just a yardstick – any reasonable method you use it fine as long as you are consistent.

  16. doug says:

    What I do is use the best guess but slightly conservative market value of my residence and then show the mortgage debt separately at the current value. However, I think you should separate investments, cash and savings from personal assets like your home, cars personal property etc. I always present all my personal assets on the statement I give the bank every year since I want to show as much net worth as possible, but for my own use I categorize everything as investments or personal.

  17. PF says:

    It’s funny, but after reading these comments, it seems like net worth is really a personal thing that depends on each individual and their situation. I would have never really thought of it that way before, but ultimately, your networth is a tool, and we each use it in different ways.

    I use a conservative market value of our home minus the mortgage. We have been building our dream home (literally, us with the power tools and lumber) for 7 years. We have hundreds of thousands in equity to show for the last 7 years of work (nights and weekends). I personally include that equity in my net worth because darnit, I earned it!

  18. Bil says:

    A house is a very illiquid asset, and very hard to sell on short notice, such as if you lose your job, or face a major illness.

    Most posters here are greatly overvaluing their home as a component of their net worth.

    When recessions hit even boom areas like L.A. see huge home price drops (early 1990s saw drops of up to 40%).

    Of course, in California you can toss the keys on the counter and walk away (but is the same true for your locality?)

    When you’ve lost your job (recession, personal medical crisis) you can’t refinance, get a home equity loan, or continue to make mortgage payments for very long.

    A popular series in the newspaper located in the largest city in our state (500,0000+) discusses entire neighborhoods with multiple houses for sale (going into foreclosure)

    When they can’t sell, those houses get rented, and guess what that does to the resale value of other houses in that neighborhood, and even higher-end housing nearby?

  19. Ted Valentine says:

    Bil’s post is sobering. This is why you have your emergency fund before you buy, you put at least 20% down, find a bargain, and you never stretch to buy more than you can afford. If you do all those things you usually have a nice built a nice hedge of protection.

  20. Art Dinkin says:

    This is a good discussion. I think the key is understanding what you are using the net worth calculation for. The “correct” answer is to include the fair market value under fixed assets and any mortgage under long term liabilities. But who cares what the “correct” answer is? There are very few places where you would ever need to disclose your net worth. When you do, you can always adjust accordingly.

    The real value of a net worth calculation is it becomes a method of scorekeeping. You can monitor your financial health by examining the changes in your net worth. With that in mind, I think there are several practical and useful ideas presented here. Use the ones that work best for your needs.

    Art Dinkin, CFP

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  22. Rob says:

    You should count your homes equity towards your networth. Not counting it is just cheating yourself. Many people downsize when they get older, also does this mean someone who rents but has the same amout of other assets has an equal networth to you. I think not.


  23. I honestly believe that a primary residence is a roof over the head and not an investment. Charles Farrell Denver Northstar Investments suggests that a home should be part of net worth calculations only if a person intends to sell it and live in something considerably cheaper. I have been through 2 significant real estate downturns. A home is not an asset.

  24. Kirk says:

    As an accountant, I would suggest the proper way to show your home when calculating your net worth would be as an asset at historical cost (purchase price), and if you wish to be more conservative you may include a reserve for selling costs (15%). You should only adjust for impairments (when the value goes below historical cost), and never for temporary market gains(conservative – realize only when sold). Show your mortgage as a liability. The difference gives you your equity (net worth).

    However, realistically, I believe Ouida (#24) is correct. With a mortgage attached, a primary home isn’t an asset, it’s a liability. Regardless of equity, if you can’t sell and can’t pay the bill, it could all be gone in a matter of months.

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