A reader asks, “Can we include our own living property/house in total net worth? I had some discussions with friends about a particular case – where the total net worth will be significantly higher than the required retirement corpus if the living house/property is included”.
“It’s an independent house in Chennai (NOT a flat!) And they are also NOT emotionally attached to the house. In the worst-case scenario, they are willing to sell the house and move to tier-2/3 cities. Can you please clarify? In my research, I came across mixed answers about including the living property (usually, it’s all assets – liabilities?).”
A fail-safe option, a plan B, or some insurance is always good. However, it is folly to include the steps of plan B into plan A and then claim plan A is feasible. Yes, residential property can always be turned into a source of income if necessary.
Either sell outright or reverse mortgage (if the property is eligible). See” Can reverse mortgage be used as an income source after retirement? But that is plan B. It becomes plan-A only if all else fails. Why?
I am ten years from retirement, and I ask myself: why should I fret so much about investing X amount each and getting a target retirement corpus? I fully own the house I live. I can always sell it, buy a retirement home near a tier 2/3 city, and use the rest of the cash to beat inflation. Or, at the very least reverse mortgage it.
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What could go wrong with this? Just about everything.
- You or your spouse may feel reluctant to shift cities later, leaving your friends and relatives.
- You may realise living in a remote retirement villa, leaving the hustle and bustle of the city, is not easy. There would be power cuts, a lack of amenities etc.
- Your children abroad may decide to return home and urge you not to sell.
- You or your spouse may develop health issues that need familiar doctors’ attention.
- You may suddenly decide to leave the house as a legacy for your kids because you have a sudden urge to do so. I could go on and on. (I know people who have changed their minds as listed).
You can’t assume your circumstances or mindset in future will be the same as today and rely on the cash flow from a current consumable. Plan A cannot rely on plan B (and vice versa).
Today, you are living in that property, and therefore, that property has no value because you will not sell. That property is not an asset. It is consumable and, therefore, should not be part of your net worth.
You may be ready to sell it tomorrow, but you can depend on such cash flow today. If and when you are ready to put the house on the market for an immediate sale, then and only then, it is an asset with value.
Also, real estate prices are arbitrary. Even if you don’t include it in your net worth, the value you estimate today (when there are no actual buyers) and the value you observe when the house is on the market (either today or later) can be significantly different. So relying on it now can be an even bigger mistake!
So if you still have a few years left to retire, don’t waste a moment of it and invest as hard as possible. If you own the house you live in, do not include it in your calculations unless you are going to sell immediately. Always treat it as an independent fall-back option.”