How much net worth should be put into your house?

net worth homeGiven the easy access to credit that we have in the United States, it is easy to purchase a house that commands several times your salary. Physicians are prime customers for lenders, as we are low-risk clients who have high earning potential and stable jobs. Easy access to credit is also a curse for us, since it is incredibly easy to overextend our earning potential to buy a McMansion.


Consider your home as a stable asset.

Those who encourage us to maximize the amount of our net worth into our primary home (not just real estate) really seem to argue that our home is a stable asset. A house is unlikely to lose its value overnight. Even if it burns down or gets wiped out by a hurricane (assuming you have hurricane insurance), you can recover a large portion of the loss through insurance. We need a place to live anyway, so keeping part of your assets under your roof is a logical approach, right? If you need to withdraw cash out of your property, you can obtain a home equity line of credit (HELOC). Your home provides you with an additional “bucket” to store your wealth.


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How liquid is a home asset?

While you can withdraw your assets in your home from HELOCs and reverse mortgages, it may only be practical for one-time uncommon large-ticket purchases. It’s not like you can cash out your home to pay for hospital bills and a new car to move into an RV without having to sell your home outright. You can withdraw equity in the home relatively quickly, but you can’t unload it completely without selling it. And as we all know, you can’t force your home to be sold. What if you ended up getting a new job in a new city? Many doctors change jobs after purchasing a new home and end up having to pay a mortgage for a house that they can’t even enjoy.

The liquidity of homes are highly variable, even within the same market. Homes in the Bay Area move like hotcakes—I have a friend who sold his house in Burlingame, CA within a week after listing. Other homes in San Francisco can be sold before hitting the market. In contrast, higher priced homes (>$500,000) in second and third tier markets can sit for years before being sold. One of my friends in Iowa has had his $550,000 home in a Grade A school district sit on the market for over a year without any buyer interest, but another friend whose $600,000 updated home in a Grade B- school district in the same city sell within a few weeks.

What I’ve concluded so far is that you can’t rely on your home to be much of any asset. You have to get lucky and sell it quickly (preferably cash deal) in order to withdraw all of your equity in it.


How do I approach home ownership in terms of net worth?

Because of relatively instability in where we live and how our primary jobs turn out, I don’t consider a primary home an investment, only a luxury. While I am building equity while paying down my mortgage, I have not seen much of a tax benefit yet from tax deductions yet. Additionally, the cost of owning a home for me has been significantly higher than renting. I have to deal with broken fixtures, lawn work, and regular upkeep costs that I would not have had to worry about in a rental.

Ultimately once I own my property outright, I can breathe easier about the rest of the expenses. I do not reside in a highly competitive real estate market, so I do not expect my property value to rise significantly if I decide to sell and move out.

Do you intend to keep any part of your net worth in your primary residence?


(Photo courtesy of Flickr)

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