The answer can be summarised as follows: you say tomato, I say potato, and if we hybridise them it’s poisonous. That’s totally not a reference to marriage, I swear. Really though, your financial independence timeline and results are the same whether you choose to count home equity or not. It’s only the math that differs.
option 1: don’t include it
…but since you do have a house, your FI# will be lower. Mortgage payments, after all, are not an indefinitely ongoing cost. (It does make the math a bit more complicated if you FIRE before paying off the house. Nothing you can’t handle, right?) Remember to budget for general homeownership, though – maintenance, rates and insurance don’t pay themselves!
Doing the math this way makes sense if you’re already in your forever house. Or a very similar one, closing costs notwithstanding.
option 2: include it
If you intend to go elsewhere in retirement, whether downsizing or moving to the beach, then it makes sense to count your current equity towards your target value. This includes the situation where you’re planning to sell the house and then rent during retirement.
You can calculate your target expenses as though you had paid off the house, then add the anticipated purchase price of your final home to arrive at a FI# target. (Again, remember to budget for general homeownership costs!) Alternatively, consider your target expenses to include rent or a mortgage payment on the forever home, and use that figure to determine your FI#.
The decision between these two sub-options amounts to: do I want to carry a mortgage into retirement? It is a few extra hoops to jump through, buying a house after retiring, but luckily mortgage brokers have seen it all before.
what if I own rentals?
Okay, real estate is different. If you’re looking to reach financial independence via rental property, it often pays to own some in your planned final destination, even to buy your final house years in advance if it makes financial sense. The real estate market isn’t a whole market, but a heap of little local markets, and prices in different areas often do completely different things. It would really suck to get to 20 years down the road, sell up your perfectly normal suburban properties, quit your job, and then find that property prices at your destination (a popular beach town) have gone through the roof thanks to AirBnB.
Either calculation method works, as long as you stick to one method. If you calculate your FI# excluding house equity and then expect it to buy you a house after you retire, you’re in for a world of trouble. There shall be no mixing and matching of methods. Potato, tomato.