Speaking of Estimating the Price of My Home, I decided to see what my parent's first home is worth today. Using Zillow.com, I discovered the estimated value of the house is now $486,000, for which they paid $28,000 about 40 years ago. It's a modest home, about 1400 square feet, but in a Washington, D.C. suburb.
This 17.4 fold increase amazed me. Over the 40 years, this was a 7.4% annual return. And based on today's tax laws, the gain would be tax free up to $500,000. This would be been one of my parent's higher returning investments, were they still living there today.
On the other hand, I don't think they would have been able to monetize their gain. Their current house, although much larger and newer, is worth about $450,000. So most of the gain from their first house would be tied up in the equity of their current house. This is the issue with counting home equity towards one's retirement. The gains may still be tied up in the house during one's retirement.
Hopefully, we will see similar gains on our house. At the same rate of increase, my first house of $75,000 will be worth $1,300,000 at 40 years. Based on a staged retirement strategy, I believe we will be able to monetize our home. In the first stage of retirement, we will continue to live in our home. In our second phase of retirement after 85, we will either sell our home or do a reverse mortgage.
For more on Crossing Generations, check back every Thursday for a new segment.
Photo Credit: morgueFile.com, Daniel T. Yara
This 17.4 fold increase amazed me. Over the 40 years, this was a 7.4% annual return. And based on today's tax laws, the gain would be tax free up to $500,000. This would be been one of my parent's higher returning investments, were they still living there today.
On the other hand, I don't think they would have been able to monetize their gain. Their current house, although much larger and newer, is worth about $450,000. So most of the gain from their first house would be tied up in the equity of their current house. This is the issue with counting home equity towards one's retirement. The gains may still be tied up in the house during one's retirement.
Hopefully, we will see similar gains on our house. At the same rate of increase, my first house of $75,000 will be worth $1,300,000 at 40 years. Based on a staged retirement strategy, I believe we will be able to monetize our home. In the first stage of retirement, we will continue to live in our home. In our second phase of retirement after 85, we will either sell our home or do a reverse mortgage.
For more on Crossing Generations, check back every Thursday for a new segment.
Photo Credit: morgueFile.com, Daniel T. Yara
This is not financial advice. Please consult a professional advisor.
Copyright © 2007 Achievement Catalyst, LLC
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3 comments:
They made no improvements in 40 years? That has to be added to the purchase price if you are going to consider this an investment.
Owning a home is a crucial key to securing your financial wealth - to enter retirement w/ no mortgate payments is a good thing.
However there are two sides to this equation, which you do a good job in showing in this post. The appreciation of their first home vs. the value of the home they currently live in. Home equity isn't cash in the bank; you gotta live somewhere.
For this reason prudent financial advisors will not include home equity when computing your net worth. But investment properties are another case. You can turn equity in an investment property into a liquid asset to fund your retirement. And including leverage, that 7.4% return looks even better.
Good post. Keep up the good work...
Anonymous,
Thanks for your comment and a very good point. Any major improvement expenditures need to be added to the price.
My parents owned the house for 15 years. I was curious what it would be worth if they still owned it.
Christopher,
Thanks for your comment and the link.
I agree one should not count home equity as "retirement" savings. Home equity won't be accessible for most people.
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