Primary residence – to include or not to include it in your net worth calculation

Do you include your primary residence in your net worth calculations? I do but I admit I have doubts whether to include it or not.

 

Reasons for including:

  • It is indeed an asset that you have. In case of financial stress, you can always sell it and move somewhere cheaper or where you pay a small amount of rent. You can also rent it fully or partially.
  • The fact that you own your primary residence means that you do not have to pay rent, i.e., you are indeed saving this money on rent you would have to pay if you did not own it.

 

Reasons for not including:

  • It might artificially inflate your net worth. If you have a house which is worth 1 million EUR which is the only asset in your portfolio and debt of 200k EUR, that situation is totally different from someone who has a 100k EUR home, 900k EUR in assets that yield 7% a year and 200k EUR in debt. The second person can be considered nearly financial independent, whereas the first one is very far from it.
  • According to Robert Kiyosaki your house is not an asset and I agree with his arguments. Our primary residence does not yield us money and generally takes money away from us, in taxes, maintenance, etc. in addition to the fact that we generally buy more expensive goods for our primary residence.

I have decided to include it because I believe argument #2 is very strong, i.e., the fact that we own a property means we will not have to pay rent elsewhere, however I admit my net worth will be highly inflated by my primary residence, which I value at 380.000 EUR, in particular as I pay down the debt.

It almost seems as I giving in to lifestyle inflation and this is positively reflected on my net worth. My net worth is being benefited by the fact that I am kind of falling in the trap of lifestyle inflation, which should not happen. Nevertheless, I would indeed pay at least 1k per month if I did not own it and lived in a house slightly worse off that the one I bought. What are your thoughts?

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Financial Statement – April

Savings rate = 48%

Total net worth increase = + 6,440 EUR

Our savings rate was not amazing this month because we had some expenses still related to the loan for our primary residence (which we do not yet live in but plan to do in the next 6/12 months).

Cash 18,100 +1,500
Net Cash flow Real Estate Business 4,000 +500
Pensions 101,930 +1,720
Security deposit for current house 2,000 +0
Rental Property #1 115,000 +0
Rental Property #2 120,000 +0
Primary Residence 380,000 +0
Debt (Primary Residence) -314,580 +2,720
Total networth 426,450 +6,440

Our cash did not increase significantly due to the fact that we have prioritized paying down our debt. In the following months we will have monthly amortized debt of over 3k every month (this only includes capital, i.e., no interests and no insurance are considered), so on average we will pay almost 4k every month which is quite aggressive. It is great though because we have an obligation to save. Since it is a huge monthly commitment, we really need to make sure we save even on the small things, which we did this month and we will have to continue doing over the next months.

I prefer to aggressively pay down debt in a short period of time for 2 reasons:

  1. I dont like debt. I know it does not sound very rational and might sound weird from someone who studied finance. But, more broadly, I dont like money commitments, especially the ones I know I am losing money, which is generally the case of a mortgage. There are so many costs that the banks charge you (more info on this post), I just feel I want to get rid of this mortgage as fast as I can.
  2. The faster you pay the loan, the less interests you pay. Even with a high interest rate, if you pay your loan fast enough, at the end of 3/4 years, you end up paying very little on interest rates because you are amortizing the capital very fast.

Some people feel more confident knowing that they have to pay a very little amount per month but what makes me feel comfortable is having little or no debt. So, I prefer to struggle in the short-term and have high monthly payments because I know I currently have a high salary which allows me to do it than just delaying this for the future. This is my way of buying my future freedom.

Financial Statement – February

Savings rate = 61%

Total net worth increase = + 7,905 EUR

This month we were pretty good in terms of savings from our monthly income. First of all, I am already on my maternity leave (3 weeks to meet baby #2) which means I am spending less money overall on small things, like going for lunch and transportation. I also have more time to go to a cheap supermarket and, in addition, we have decided to stop ordering food. Deliveroo was eating a chunk of our budget and we were ordering 2 or 3 times a week. It is amazing how much money you can save by only changing small things!

I managed to pay the overall debt for Property #2 and my husband has only very little to pay off. We want to get rid of this debt because we are thinking about buying our primary residence as I have told you in my previous post. We will ask for another personal loan for that purpose but the conditions would be much worse if we have 2 open loans. We are now struggling with the option of selling one of our Properties that we are currently renting short-term, we are not sure whether to do it or to ask for a proper mortgage. Tricky decision as I am very frustrated with the amount of costs you pay when you ask for a mortgage, even with a low interest rate environment! But, on the other hand, selling one property would significantly decrease my future passive income. So, we are still undecided!

If you look at my past financial statements, the real estate business is not yielding much money in the last couple of months, which is mostly due to the fact that it is low season, which means less cash per night and lower occupation rates, plus it is winter, so overall increased costs, in particular heating costs. The revenues should start increasing from April onwards, which should boost our net worth, and also allow us to have more cash to use to pay for our primary residence.

Cash 10,850 -650
Net Cash flow Real Estate Business 3,300 +100
Pensions 98,460 +1,730
Security deposit for current house 2,000 +0
Rental Property #1 115,000 +0
Rental Property #2 120,000 +0
Debt (Bank) -2,750 +6,770
Total networth 346,860 +7,950

I am happy overall just by seeing that we are approaching the 350k networth. Seems like a cool round number to me 🙂

The hidden costs of a mortgage loan

I have recently been searching for apartments, not for the purpose of investing, but as a primary residence. I know, my house should not be seen as an asset and it is definitely not the smartest financial move I can do, however I do feel that I would be more emotionally comfortable if I buy my own apartment. Ultimately, you have to feel good about where you spend your money!

We currently own 2 small apartments which we rent short-term, we bought them relatively cheap and now we are checking the possibility of selling one of them, making a profit, and using that cash for our primary residence. As our primary residence would be a 3-bedroom apartment and in the capital city, we would still need extra cash to pay for it, which we currently do not have. And this is why we have decided to contact banks to understand how much would we pay for your mortgage. I am completely shocked and I have decided to share my concerns with you so that you can also be aware of all the costs you will face when asking for a mortgage.

First of all, there are taxes and costs related to the purchase of the house you have to take into account. If an apartment is advertised at 300k, do not forget you have to pay 300k + taxes + other costs. Depending on the country, normally you need to add at least 4% on the advertised price.

In terms of costs that you have to pay to the bank, there are a lot of small costs and the fact that banks do not generally merge all of those has a purpose, i.e., so that you do not clearly see how much exactly you have to pay. Be aware of:

  • Costs you have to pay at the beginning of the mortgage: depending on the country, those can include taxes on the mortgage (in Portugal you pay 0.8% on the value of the mortgage) + numerous small costs for formalising the deal, such as payment for evaluating the home and others. Those can easily increase the price of your home by 1% or 2%, which is relatively significant.
  • Interest rate: currently interest rates are very low which might be an incentive for people to buy real estate. Indeed, we were offered a 1% rate, which is quite low. However, even with a 1% interest rate, if we are considering a 300k loan, we would pay 65k of interest over the period of 40 years, i.e., an average of 135 Euros per month. In addition, in many countries, they do not offer you a fixed rate, but instead a spread on the Euribor. As the Euribor is currently around 0%, banks assume this will be the rate for the next 40 years when they provide you with the mortgage payment simulation. This is very misleading! Be aware that most likely interest rates will increase and, therefore, we would have to pay more than 65k.
  • Insurance: Because banks need to be protected in case you do not pay your mortgage, they generally request that you have both a home and life insurance. Normally they also have an insurance company in the group and they strongly recommend that you use their products. In our case, the costs of the insurances over a period of 40 years was almost 100k, i.e., almost 200 Euros monthly.

Even though this is all very country specific, I believe in general the rules are relatively similar in Europe. Of course the exact costs and %s will depend on the country, banks and your specific individual situation.

Summarising and just to give you an example with numbers, if you are buying a home of 300k, you will have to pay to the seller 312k. You will then have to pay the bank as initial costs around 3k, which makes the total initial cost of the property = 315k. If you are granted a 40 years’ loan, even with a low interest rate, you will pay 165k in total for both interest rates and other costs (mostly insurance). Total price of the apartment = 480k, 60% higher than the advertised costs of 300k.

Crazy, right?

Financial Statement – November

November: another great month!

Savings rate = 57%

Total net worth increase = + 8,445 EUR

This is great to compensate the crazy month of December. Even though I try to be frugal, I always end up buying a few things for some family members that would take it wrong if no gifts are exchanged + I go back to my home country and I met with so many people I haven’t seen for ages, which means I end up spending way more than normal on lunches/brunches and dinners.

Cash 8,350 +2,400
Net Cash flow Real Estate Business 2,500 +1,300
Pensions 89,890 +1,560
Security deposit for current house 2,500 0
Rental Property #1 115,000 0
Rental Property #2 120,000 0
Debt (Bank) -15,890 +3,185
Total networth 322,350 +8,445

I am now 36% FI 🙂

Financial Statement – October

October was a very exciting month! We were able to grow our net worth by 9.285 Eur, which is the maximum we have been able to do so far. There were a couple of reasons for this success:

  • Our savings rate was 57%, which is probably the highest value so far. I calculate our savings rate based on our salaries and I do not consider the cash-flow yield by our real estate business. No big or unexpected expenses this month!
  • I have adjusted the value of our rental properties and increased the overall value by 2000 Eur. Still, the values I consider are at least 20% below market value, but I want to be on the safe side here in case of a market crash. To compensate for this, I have decreased by 1000 Eur the money we expect to receive when we leave our current flat. Due to our baby, the flat is not as in good shape as it should, I am assuming we need to spend some money arranging the walls and the floor before we leave (2500 Eur is my current estimation).
  • Our real estate cash-flow has yield us 1.200 Eur net, which is amazing especially taking into account that we have hardly any work and it is not high season anymore.

 

Cash 5,950
Net Cash flow Real Estate Business 1,200
Pensions 88,330
Security deposit for current house 2,500
Rental Property #1 115,000
Rental Property #2 120,000
Debt (Bank) -19,075
Total networth 313,905

I am 35% FI (still 65% to go!). Seems like a lot but I think the hardest work is done, which is to get enough cash that allows you to start investing and creating passive income. In our case, passive income is generated through real estate but you can of course decide on what products suit you the best.

Currently, I am having another dilemma: invest the money we are saving or save it and buy a property for us to live in the future?

Financial Statement – May

Even though our savings rate was not great (48%) we managed to take care of many things related to Property #2. We will pay it completely over the next couple of days/weeks, therefore I have already excluded the cash we are about to pay from the Cash category.

Cash 600
Peer to Peer 863
Pensions 78,030
Security deposit for current house 4,000
Rental Property #1 100,000
Rental Property #2 133,000
Debt (Bank) -35,000
Total networth 281,493

Very soon I will update you on the real numbers of my first real estate investment which is yielding more than what I had previously calculated!