Is my House an Asset or a Liability? | Why Owning a Home is not Always a Good Investment
Index:
3) What's the opportunity cost of buying a home?
4) Is it a good idea to buy my own house?
5) How to turn a property into an asset
6) What's the best way for me to invest in property?
7) What's the alternative to buying a house?
8) Summary
What’s really an asset?
I need to disclose the main problem with this discussion right off the bat.
The dictionary definition of an “asset” is completely unhelpful for the average person and it’s losing them potential money.
The dictionary definition of an asset when it comes to home ownership is something like this:
“An asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit,” (Investopedia).
Or,
“Assets are property or items that you or your partner own in full or part, or have an interest in,” (ServiceAustralia).
The disparity can be simply illustrated below:
“Essentially, your assets are everything you own, [while] your liabilities are everything you owe,” (Investopedia).
The problem here is viewing ANYTHING that you own as an asset, just because you have it.
Does the future “benefit” of simply having an appreciated home that you live in and would need to sell in order to realise gains, on top of the benefit of simply having a place to live in - outweigh all the monetary and opportunity costs that come with the house?
Maybe.
It depends on you specifically and what YOU want out of the next 10-15 years, and what your values are.
Now that we’ve got that out of the way, let’s begin.
Is a house a liability?
Most people simply live in their home and slowly pay off the mortgage.
They receive no cashflow like they would if they owned a rental property.
The home is a liability for people that live in it because it’s only taking available cash AWAY from you.
Sure the equity increases as you pay off the mortgage and the price of the home (likely) appreciates, but how’re you gonna use that equity?
You might use it as collateral to take out a loan for a new car or other expenses, ALL of which are liabilities.
I say that because most people don’t own businesses and therefore, pretty much ANYTHING they take a loan out for using their home equity will simply take even MORE money away from them.
But what about your homes appreciation, isn’t that a good thing?
You’re extremely unlikely to reap the benefits of an appreciated home, because if you sell that property, where’re you going to live?
Even by selling your property, it would probably not return that much more than you paid for it, considering the interest paid on your mortgage and all the other taxes, insurance and expenses that you’ve paid over the years.
Moreover, the expenses besides the mortgage still remain when you fully pay off that mortgage and continue to live in your home, so even this common goal for people doesn’t necessarily make their home a monetary asset.
In other words, it still doesn’t make them any money.
Many Australians make small gains by buying and selling appreciating homes, but if you treat home ownership as an emotional investment like most people do, you’re going to lose money.
My point here, is that you should be doing SUCH due diligence on the places you end up buying to live in, that you CAN buy and sell for a high profit.
Otherwise, whatever gain you make from appreciation will likely not at ALL be enough to go easily find another place to live in.
In summary, the equity in most people’s homes is useless and doesn’t necessarily make it a serious monetary asset (ability to make money for you).
What’s the opportunity cost of buying a home?
There’s also an opportunity cost of tying all of your money up in an entirely illiquid asset (illiquid - not easy to take money out of, because you’d need to sell it).
While you spent up to 30 years living in this house paying for all these different expenses and for your main liability (mortgage), you could’ve invested that money into index funds at a 7-12% annual return, receiving dividends and being able to quickly realise gains if you wanted to, or you could’ve started a business.
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Is it a good idea to buy my own house?
This opportunity cost is another reason people disagree on an answer to the question, “is my house an asset or a liability?”.
While the house is a monetary liability and loses you money if you live in it and have to pay for all loans plus expenses, it’s a practical asset because you now have a safe and secure place to live.
Somewhere you can return to from work and a roof you can live under with your family.
This is still something that needs to be considered, but keep in mind that the definition of an asset becomes dynamic at this point.
Sometimes we say something must be a practical asset that gives you SOME benefit like a roof over your head, and sometimes it must be a monetary asset that makes you money.
So,
A house to live in is usually a practical asset, but NOT a monetary asset.
Now, back to cashflow.
How to turn a property into an asset
Since you’re not receiving any cashflow, you’re in a perfect position to default on your mortgage + interest payments to the bank if a recession begins or you get laid off from your job.
This means that you’re in a position to have your house forcefully taken by the bank.
In addition to your mortgage, you’ve also got to pay for your yearly property tax, electricity and internet, insurance, wear-and-tear and utilities.
These are all liabilities while you’re paying for them, but are instantly diminished down to nothing or almost nothing once you get TENANTS to start paying for it all.
So, what’re your options when it comes to turning property into an asset?
Firstly, we must consider the current money system that Australia uses.
When looking at the perpetually increasing and unstoppable amounts of debt in most major economies like Australia, the UK and the US, the value of our currencies are going to decrease over time.
This is called currency deflation, and if you took out a FIXED interest rate mortgage, the real value of the money you’re paying back on each payment is actually decreasing over time.
In a weird way, this means you’re literally paying less money as time goes on, as opposed to a VARIABLE interest rate, which would keep up with any changes to the value of a currency and leave you paying more in the long-run.
With a fixed rate mortgage, the longer, the better.
In Australia, however, you can’t get 30 year loans like you can in the US, but you could potentially get 10 year fixed rate loans.
What’s the best way for me to invest in property?
What’re some strategies you can use to make property a REAL, lucrative investment and therefore an asset?
1) Well, you could do what people normally do and pay the downpayment on a place.
However, you’d ensure that you’ve got a 10 year fixed rate mortgage (in Australia, 30 years in the US), ensure that you’ve actually done your research on the potential of that estate to appreciate or have renter demand in the future (like any real estate investor would) and then rent out a PORTION of the house.
Basically you’re living in one area, which can be most of the house, and then rent out another area for someone and let them use any other amenities in the house.
Or you could just purchase duplexes, triplexes and so-on, but there aren’t heaps of those so you’re restricted in the locations or markets in which you can invest.
BUT, here’s an arguably better option that uses both investment and rent:
2) Put money down for an investment property to completely rent out, while renting out another place.
Now the thing here, is that you should have done such adequate due diligence on that investment property, that you can charge a high rent and attain a high cashflow, while being willing to rent out a very cheap place for yourself.
A common and fairly effective way to see if potential investment properties will allow you to make enough rent money to get into a positive cashflow is something similar to the price to rent ratio and the rental yield.
Monthly rent/purchase price of home x 100%.
If your property of interest is above 1%, you’re more likely to end up in a positive cashflow, with tenants FULLY covering the mortgage, other expenses and then leave a little more to go into your pocket.
You’d get an investment property in one area that you think will immensely expand or appreciate in value, but actually LIVE (by renting) in an area you think could DEPRECIATE in value.
Or just a cheap area with minimal nearby schools or increasing UN-employment.
Those last two things will prevent an area from appreciating as much as other areas and unemployment might not affect you if you’re running an online business on the side like we’ve mentioned or go down an entrepreneurial road.
And, if you’re investing in real estate to put tenants into, you kind-of are going down an entrepreneurial path.
Either way, with this strategy, you retain flexibility of renting and being able to move at will, while also having real estate investments that are actually making you money.
What’s the alternative to buying a house?
There’s a tricky thing about this whole asset/liability discussion; what’s the alternative to buying a home if living in makes it a liability?
If you don’t buy a home and instead, you go pay rent to live in a place, you’re STILL receiving no cashflow.
Except that historically, homeowners have ultimately paid more than renters when considering all expenses, although rent prices ARE increasing…
If the person you were renting from was smart, they’d make you pay an amount high enough to cover all the expenses that they’d usually need to pay.
Although we must also keep in mind the psychology of the average person:
A homeowner often looks at “the best home that I can possible buy with my current finances”.
While a renter usually says something like “what’s the cheapest place I can live due to my current finances?”
The second method I outlined in the previous question is probably the best solution to this dilemma.
But what you ultimately choose to do with buying properties is up to you, in regards to whether you want to travel, want to settle down early with a partner and children and whether you’re okay with living cheaper for bigger financial gains in the future.
Summary: Why is my house for living in not an asset?
It’s important to consider the fact that when most people buy a home, it’s emotional and they’ll get the best place that they can afford.
Meanwhile, a renter’s looking for the cheapest place possible.
What we can conclude is that a house is mostly a financial liability if you live in it and an ASSET if you have a tenant living in it that’s FULLY covering the property taxes, insurance, utilities and damages.
At least, they’re covering enough that you’re receiving more spendable money from them than you’re expending on the property.
Keep in mind, that even by living in a property, you can decrease just how much it’s eating away at your savings by ensuring that it’s a duplex, triplex or more, so that you can rent out PARTS of it.
Moreover, you detach your emotions from the buying decision and actually treat it like an INVESTMENT, which it is.
This will be hard for some people, but I’d say the more you research real estate, the more you’ll begin to look at it as a great opportunity to build cashflow, usable equity if you DON’T live in it and as a means to build wealth.
One way we can integrate both of these things is via the strategy I outlined before:
You can carefully choose a property after learning plenty about the local markets in your country, real estate in general and after doing your due diligence on the property, then taking out a mortgage on it and renting it out for a price that puts your cashflow in the positive, while YOU go and rent out a cheap place to live in yourself.
You should hopefully find yourself earning a little bit of positive cashflow from your tenants after they’ve covered all relevant expenses, which you can put towards paying to live at your own place along along with the money you earn from doing whatever you do for a living.
Or, you can put that cashflow into index funds and ETF’s over time, so that it builds until you’ve got enough for ANOTHER downpayment on another well-researched property to put tenants in.
OR start piling up this positive cashflow into initial capital for an online business of sorts.
And the process repeats, your cashflow increases and your net-worth builds as your equity does - which happens as your mortgages are paid off and the properties appreciate.
That’s it!
Disclaimer: None of this is financial advice.
Merely, it’s a subjective point of view on the topic of real estate and for entertainment purposes.
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Talk soon, my friend.
Riley.
References:
Average Australian renter paid $3,000 more last year, research finds
Economic Value: Definition, Examples, Ways To Estimate
Is Money and Debt the Same Thing?
What Is A 30-Year Fixed Rate Home Loan?
Average Australian renter paid $3,000 more last year, research finds
Price-to-Rent Ratio: Determining if It's Better To Buy or Rent
7 Unique Ideas for an Online Business
Is my house an asset or a liability?