Home Value $100,000
Down Payment $20,000
Debt $80,000
Decrease in Assets of $20,000 (Credit), Increase of Liab of $80,000 (Credit), Increase in Equity of $100,000 (Debit) $20,000 assets = $100,000 equity - $80,000 liab
From a balance sheet perspective, nothing changes. Except net worth on an individual by individual basis isn’t JUST about a personal balance sheet. Net worth run into liquidity problems (houses are not liquid, anyone that tells you otherwise has never touched a mortgage company). Looking at available leverage (ie debt to income ratio) shows an increase of debt with no change in income.
This is not even considering the loss you take on the interest of the loan, the risk associated with what will happen to the value of your house, etcetcetc.
Not trying to sound like a tool, but this is quite literally what I do for a living. Net worth 100% goes down with the buying of a mortgage (I also double checked with the VP of Underwriting and my corporate controller down the hall so I didn’t look like a dumbass here).
Yup. No net worth change assuming no fees in your example, which for this discussion simplifies things.
I think this depends on what you bought the property for. If you are assuming you will live in the house, true, no change in income (although you will have a cost reduction as you won’t be paying rent). What if you rent the property and your rent covers the mortgage amount? That would be a solid investment, increasing your income potential while building equity. A viable way to leverage the bank’s money and use the acquired debt to build a greater net worth. Much better than having $20k sit in the bank.
Again, assuming no fees that statement is not true. Look at your example above, you stated above the net worth doesn’t change on the balance sheet (which is correct) only to follow it up by saying net worth goes down. Those statements are not consistent. Your liquid net worth changes, as you acknowledge, but overall net worth does not.
This is the risk of the investment. The value can go up not down. It can also be smart to leverage the value of your house using a mortgage to put that money towards an investment that would be higher ROI than what you pay in interest to the bank.
The net worth of an individual isn’t something that can be boiled down to assets, liab, OE. At a basic fundamental level, sure, it works every time. But when it comes to evaluating a TRUE net worth, a ton of factors come into play (liquidity of your assets, scheduling of your liabilities, etc).
I don’t think they need to double it, however we need some kind of paradigm shift in employment, labor, and economics in general. The information age has changed much faster than society as a whole can adapt. This was predicted in the late 1960s by Alvin Toffler in “Future Shock” - a really remarkable book. The documentary is on youtube, I think. You might want to look into the 6 hour work day, proposed in the 1930s no less and implemented by Kellogg himself:
To evaluate net worth, you must consider the liquidity of an asset and it more or less gets “weighted” in an overall number.
By real net worth, I mean the net worth that would be assigned by a lending institution (because ultimately this is the only version of net worth that matters when talking about an individual and not a company).
Edit for example: Hedge Fund owns 50,000,000 shares of Microsoft. Book value states the value is 50M x current share price. Since unloading 50M shares at once would considerably tank the price of the stock, the liquidity of the shares plays a factor into what 50M shares are ultimately “worth”
Using that standard putting money towards any investment would be less cash and more non-liquid assets, leading to a slight decrease.
I’ll go back to the beginning statement:
That is vastly differently than saying “buying a house changes the liquidity of your net worth and it would be valued at slightly less due to it not having as much cash even though the book value stays the same”
Fair enough, I guess we were talking about different things. But even with this example, I wouldn’t say buying 50,000,000 shares of Microsoft as a Hedge Fund would instantly tank the fund’s “worth”.
You’re Warren Buffet and you’re looking for a fund to buy for shits and giggles. Hedge Fund ONLY owns these MS stocks. Are you willing to pay 50M x share price to acquire this company?
During valuations they use accounting standards so yes, I think the value would come out to the hypothetical $50M. Me being such a great investor I would negotiate any way I could to value it less, and I’m sure they would do everything they could to slap a little good will on top of the assets on the books.
If I made such a purchase I would not be tanking my net worth as that is now part of my portfolio.
This isn’t how it works outside of book learning. Adjustments are made in the real world to account for liquidity.
Also if you made such a purchase outright, you wouldn’t be tanking your net worth. If you borrowed said money, you would be (as future expenditures of the interest portion of the loan come into play).
Edit: Also I realize now I was nowhere near clear enough with my original line of thinking. You were right to question.
I think that depends on what the ROI is on the investment. No stock purchase is made on the assumption the price will not move without dividends.
If you stand by your original statement we’ll have to disagree on the value of purchasing a house. I have done it multiple times, for rental properties and for a home for myself and my net worth never tanked. I will conceed that you are correct in stating:
As a side note, you keep mentioning interest on the loan like it is in the 80’s. The interest rates on a loan over the last ~10ish? years have been low enough that it is fairly easy to beat with a low-risk investment portfolio. Leveraging the bank’s money through debt is standard practice in wealth building. I’ll take a 3% loan from the bank anyday where I can earn 8% on it while paying it back.
Edit: Thanks for the fun discussion, getting me through my boring Friday.
There is an intrinsic (sp?) value of owning a home. Lower average cost per sqft compared to renting, usually better school zones, building value over time in your house, etc. The “price” for this better living condition is the interest on a loan.
200k home (far below national average) with 20% down at 3.5% interest rate will end with ROUGHLY 400k in total payments over the life of the loan. Roughly 90k of that is due to the interest of the loan. No small amount for most people.
I will agree 100% that leveraging your home into other investments is a great idea, but that requires a level of leverage that most people simply don’t have access to. Not to say they can’t work up to it, but it’s not a realistic option for the majority of Americans.
You guys are arguing about NOLV…Net Orderly Liquidation Value?
That’s for businesses assets and is usually used in an asset based lending agreement.
If you are talking about individual net worth that doesn’t always apply. If you transfer your wealth to heirs correctly it need not be weighted for liquidity since nothing gets sold.
True, but over 30 years what will that 200k home be worth? Depending on the market it could grow to be well over 400k. I think stating the amount paid in such a way is misleading. There is interest, absolutely, but with how low rates are now it is unusual that other investments or the property value can’t keep up with 3-4%.
I’d argue the increase in value of a house will never touch the upkeep costs in the long run. If you’re going to account for the increase in value, you also have to account for the cost of getting to that point in time where the value has increased.
Really depends on the market and the house. Condos have very little upkeep.
My wife (before we were married) increased the value on a 200k house by 50% in 3 years. She did all the improvements herself for about $20k.
I have family in Colorado right now and the housing market has been going up at over 10% per year over the past 5ish years, far beyond any upkeep costs.
It is not a sure thing though, as evidence by the housing market collapse.
Yeah the market has been doing some crazy shit lately. Mortgage companies across the country have been exploding. The one I work for ended up with an increase in closed loan volume from 15 → 16 of about 35%
I think we’ve gotten WAY off topic, but it has been crazy. I was fortunate (or dumb luck?) to have some places before the recent uptick and it has really helped my…wait for it… net worth (full circle right?).
You should stick around. You seem level headed and I think it is good for the discussion around here to have different opinions and I’ll be happy to challenge you every time I disagree
Yeah I’ve been trying to get better about that. I’ve personally got a bad habit of going off in random directions. I’m like a dog trying to decide between 3 tennis balls haha.
TBH I was genuinely surprised at how high quality the forums are here. A buddy of mine got me into lifting a little while back and I stumbled across a t-nation article because even though I never really “dedicated” to lifting, I’m still a dirty tryhard and refuse to do things without optimizing what I’m doing.
Absent corroborating evidence (which I would be keenly interested to see), this is not an argument–it is a statement of religious belief.
“Overly complicated”? I don’t even know what to do with that.
It would indeed. And I would do so, were it true. The fact is, I am trying to build a defensible position that does not rest upon asserting its conclusions (as does your ‘natural rights’ argument).
I never denied the existence of property rights; I challenged the notion of absolute property rights, particularly as applies to pre-tax income. I most assuredly acknowledge the existence of relative property rights.
As for whether one has absolute ownership of themselves, that seems like it would be a difficult argument to make, but one perhaps best set aside for the time being.
