I bought a big old house. It tanked my savings rate, but the equity might make it worth it?

The Net Worth Question

Whenever I talk about financial independence and early retirement, people always ask me if I include my house in my net worth calculation. It’s a good question, and the answer is…I do! But you might not want to.

My House Journey

I used to live in a smaller and more modest home, where I saved a lot of money. My monthly savings rate was usually over 50%. But then the pandemic hit, and I started thinking about more space. I fell in love with a bigger and more expensive home, and now I’m definitely not saving 50% of my income every month. Oops.

Not My Forever Home

This new house is nice, but it’s not my forever home. It’s perfect for now, with two home offices, a home gym, and outdoor space to gather with friends. This was 100% the perfect pandemic house. But when I think about retiring, this house is too big. You don’t need two home offices for two people who don’t have jobs. And I don’t think I’ll have an appetite for the maintenance that much longer. (We have spent nearly $30k on home maintenance since buying in 2021! And actual costs aside, I don’t love the uncertainty of surprise expenses.)

The Downsizing Plan

So I plan to downsize. I want to live in a condo by the beach, somewhere warm and low maintenance. (I know this a brand-new idea for retirement that no one has ever had!) That means selling this house and using the equity to buy something smaller or investing it for early retirement income that could pay the rent.

Expected Equity

I don’t have a crystal ball, so I don’t know what the housing market will do in the next few years. But I do expect, if all goes well, to have at least $200,000 in equity when I sell this house, as a combination of paying down the mortgage and the value increasing.

I’ve considered keeping it as an income property, but I don’t know if that’s wise. One, because I’d still be dealing with the maintenance. Two, I’m not sure how much of a market there would be for it as a rental. And three, the mortgage is pretty high, so it wouldn’t cash-flow much.

The Math of Downsizing

Let’s say we sell this house and walk away with $400,000 in equity (which is really, really optimistic, but let’s just go with it for now). If we follow the 4% rule, that means we would have an additional $16,000 to spend every year, or another $1,300 per month. On the other hand, the housing market could also crash and we could walk away with $0. I don’t know what’s going to happen, so I’m going to plan for contingencies either way. (And I’ll keep you posted!)

Enough About Me

If you’re in your forever home, it might not make sense to consider your home equity when you’re calculating your FI/RE number or your Work Optional number. If you’re planning on early retirement, you have to have a plan for where you’re going to live one way or another: a paid off home, room in your budget for rent or a mortgage, or maybe no home! Just travel full time and live out of a suitcase? Your home equity can help you in retirement, but not quite as much if you still live there.

Are you in your forever home? Planning on using home equity to fund your retirement? Tell me, tell me!