Blog | Real Estate

Is a House an Asset or a Liability?

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An uptick in adjustable-rate mortgages and being doomed to repeat the past

A cultural right of passage is buying your own home. Many people dream of the day when they get the keys to their own front door, imagining the joy that will come with the monumental achievement of taking on hundreds of thousands of dollars in personal debt.

I’m, of course, only being slightly tongue in cheek.

Is a house an asset?

The reality is that many people desire to buy a home because they think of it as a good investment. In terms of a financial statement, they think of their house as an asset. Because of this, in many cases, homeowners expect their house to be a big part of their retirement plan.

For instance, as Rob Carrick writes for the Canadian “The Globe and Mail,” “In a recent study commissioned by the Investor Office of the Ontario Securities Commission, retirement-related issues topped the list of financial concerns of Ontario residents who were 45 and older. Three-quarters of the 1,516 people in the survey own their own home. Within this group, 37 per cent said they are counting on increases in the value of their home to provide for their retirement.”

The sentiment I’m sure is the same here in the US, and in many places throughout the world.

The problem with this thinking is that many people simply do not know the difference between an asset and a liability.

My rich dad, my best friend’s dad, taught me the simple definition of an asset and a liability. An asset puts money in your pocket. A liability takes money out. To illustrate this, he played the game of “Monopoly” with us because he believed games often are the best teachers (which is also why I invented my financial education board game, CASHFLOW).

The simple premise of “Monopoly” is that you want to buy as much property as possible, place rental houses on those properties (and eventually hotels), and collect rent to become richer than anyone else in the game. The formula was simple, four green houses and then a red hotel. It was a mini-picture of the power of velocity of money as you create more wealth from higher rent to buy bigger assets. It was also the perfect picture of how a house can be an asset—by putting money in your pocket as a rental property investment.

A house is often not an asset but instead a liability

The problem is the majority of people who buy houses do so as a primary residence, not as a rental property. So let’s break down what that looks like financially.

On a given month for your personal residence, you need to pay for your mortgage, utilities, maintenance, taxes, insurance, and possibly more. Sometimes these can turn out to be huge costs, for instance, if you need to replace a roof or your main plumbing line collapses.

All of these are things that take money out of your pocket. And as rich dad taught, a liability is something that takes money out of your pocket.

Many so-called experts will point to things like paying down principle, tax breaks from mortgage interest, and appreciation as reasons why the house is an asset, but paying down principle is simply saving and savers are losers, the tax breaks for your mortgage do not offset the costs that go out of your pocket each month, and if you’re banking on appreciation, you’re basically gambling, as homeowners in the Great Recession painfully discovered.

This is not to say you shouldn’t buy a house. I’m simply trying to help you see that it is not an asset. Rather it is your home, and should be enjoyed for that, not as your ticket to a secure retirement. Look elsewhere for that. Truth sets people free, and the truth that your home is not an asset but instead a liability is one of the most important truths you can know.

ARMs Dealers

Unfortunately, most people simply don’t understand this fundamental truth. This is why I’m not surprised to read that now that housing prices have gone up steadily since 2012. We have a short memory, and the Great Recession is all but erased from the consumer consciousness. This is evidenced by the fact that we started to see people take on riskier mortgages starting in 2017 and continued to do so in 2018 .

As CNBC reported in 2017, “The number of adjustable-rate mortgage originations jumped just over 40 percent from the first quarter of this year to the second, according to analysis by Inside Mortgage Finance.”

For those needing a refresher, an adjustable-rate mortgage, or ARM, allows potential homeowners to purchase more expensive houses by having lower interest rates than a traditional 30-year fixed-rate mortgage. ARMs are usually offered at one, three, or five years, meaning the interest rate will adjust to market rates after that period. In essence, it’s betting that interest rates will be as low or lower down the road…and that you’ll be in a better financial position to pay more, should the need arise.

You might not be surprised to hear that defaults on ARMs were a big part of why we faced the great recession from 2008 to 2011. And while there are new safeguards in place to ensure that ARMs aren’t given to sub-prime borrowers, there is something of a frenzy that is building around buying homes in the US again. This, again, is because people inherently think they are assets. After all, don’t housing prices always go up?

That’s what you’d believe if you followed most conventional financial advice.

Bad financial advice is also a liability

Rich dad believed that people struggled financially because they make decisions handed down from parent to child, and most people don’t come from financially sound families. He often said that most bad financial advice was handed out at home, which is one reason I am an advocate for financial education in the home.

Of course, for most people, while financial advice starts in the home with old rules like go to school, get a good job, save your money, buy a house, and invest for the long term in a diverse portfolio of stocks, bonds, and mutual funds; it doesn’t end there. Many people also take the bad advice their parents give them and compound it with bad advice from financial advisors as they get older.

Many financial advisors will tell you that your house is an asset, but that is untrue. As such, this financial advice becomes a liability because it causes you to make bad assumptions and decisions about your personal wealth and your financial future.

The fact is that when financial advisors say a house is an asset, they are not really lying, but they aren’t telling the whole truth either. Your house is technically an asset, they just don’t say whose asset it really is.

Is a house an asset? Yes, the bank’s

If you look at a bank statement, it becomes easy to see just whose asset your house really is—the bank’s asset.

Most people do not own a home…they own a mortgage. Those who are financially educated understand that a mortgage doesn’t show up in the asset column on the financial statement. It shows up as a liability. But it does show up on your banker’s balance sheet as an asset as you pay the bank interest every month.

Remember rich dad’s definition of an asset, “Anything that puts money in your pocket. A liability is anything that takes money out of your pocket.”

As I mentioned earlier, if you look at your bank statement every month, you’ll see that your home puts no money in your pocket and takes a heck of a lot of it out. This is true even if your house is paid off. Even after you pay off your mortgage, you still have to pay money every month in the form of maintenance costs, taxes, and utilities. And if you don’t pay your property taxes, guess what can happen? The government can take your home. So, who owns your house really?

Don’t let thinking your house is an asset be your liability

Again, am I saying don’t buy a house? No. I own a home myself, but I didn’t buy it as an asset or think of it as an investment. I bought it because I wanted to live in it and was willing to pay for the privilege of doing so. Could it appreciate in value? Maybe. But it could also lose me money in the end. I don’t really care.

What I am saying is don’t buy a home and think of it as an asset or investment. That’s just simply a lie. Unfortunately, that lie continues to perpetuate here in the US and around the world. And until it’s finally put to rest, we’ll continue to see booms and busts in the housing marketing.

Original publish date: October 24, 2017

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