There are many people that believe the greatest asset they own is their residence. Unfortunately, that is often not the case. It is a shame to watch people spend money on their house falsely believing that it is a great investment. Let’s discuss a few items and try to clear up why a house is a liability and not an asset.
The three most important things to know are the definition of an asset, definition of a liability, methods to make your primary residence cash flow.
What is an Asset?
The definition of an asset is an income producing item that is in your control. An asset must make more money that it expends, and therefore it must have a positive net, not gross income.
An item should not be deemed an asset if it has the potential to make money later, or upon sale. It should only be deemed an asset if it is currently making money. The shortest way to explain this definition is that an asset puts money into your pocket!
This definition explains why your house is not an asset, because it doesn’t put money in your pocket. Appreciation is wonderful, but until you have realized the capital gains at sale the property is still costing you money. More on this here
What is a liability?
The definition of a liability is an item in your control that costs more to maintain than it earns, or has a negative net cash flow. An item that costs money to maintain, but might make money down the road is still considered a liability until the day it breaks positive net income. Basically, a liability takes money out of your pocket!
Most primary residences cost a lot of money to own. The owner must pay the mortgage, insurance, utilities, property taxes, maintenance, capital expenditures, and any other expenses that arise.
These days people move around frequently and rarely live in a house until the mortgage is completely paid off. If you do get it paid off a good majority of these expenses will still remain expenditures long after the house has been paid off, and will therefore always cost the owner money.
Sure, an owner could make money if they eventually sell the house, but it won’t make them money until that date, and only if the market has improved enough to cover all previous expenses.
How to Make your Home an Asset!
I often tell people to ensure they purchase their house as an investment, rather than a primary residence. The difference is that an investment is purchased based on the cash-flow and income/expense numbers. Conversely, a primary residence is purchased based on emotion (how it feels). Emotion-based decisions are not always the best, and I would caution you to make a large purchased in this manner.
That being said here are a few ways to turn your primary residence into an asset!
-The owner could rent a room or two out, and potentially cover the expenses of the house.
-The owner could build an accessory dwelling unit, or in-law sweet, and rent this unit out In order to cover the expenses of the house.
-Instead of purchasing a single family home, consider purchasing a duplex, triplex, or 4-plex as your primary residence. Now you can turn around and rent the other units out in order to produce income. Brandon Turner calls this strategy “House Hacking”. Obviously, this takes a little more effort and might not be ideal as a “forever home,” but it could easily cover expenses, and might even be quite lucrative.
If You Can’t Buy an Asset, Rent.
If none of these options are appealing then it might be worth considering the possibility of being a tenant until in a more financially secure place in life. There is nothing wrong with being a tenant if you live in an expensive area. For example, I am currently stationed in Hawaii and live on base. That is because I get more bang for my buck than if I had bought a house here. Grant Cardone is a huge proponent of renting your personal residence, and I can see where he is coming from.
Click here to learn more about my thoughts on buying vs. renting.
Unless a house is producing income, it is not an asset. This is a fairly unpopular view on primary residences, and very contradictory to the normal viewpoint. It is, however, the most accurate and unemotional way to evaluate the major financial decision to become a homeowner.
Owning a house is a great goal to have, just ensure you buy it on the right terms to cover your six!
*Please note this post was originally an essay I wrote for college*
Kiyosaki, Robert: “Your House is Not an Asset” (2016) http://www.richdad.com/Resources/Rich-Dad-Financial-Education-Blog/August-2010/repeat-after-me-your-house-is-not-an-asset.aspx
Turner, Brandon: “House Hacking 101” (2013) https://www.biggerpockets.com/renewsblog/2013/11/02/hack-housing-get-paid-live-free/