Is Your House an Asset or a Liability?
Deciding to purchase a house for your own or for your family is one of the most important decisions you may have to make in life. When trying to make a decision, we factor in the pros and cons. Besides the protection and security, a home provides for our physical well-being, we primarily take the costs into account. It is the part where we weigh the options available in front of us and assess whether buying a house could be an asset or a liability. Read on to learn and help you weigh in on your home-buying decision.
Define The Why
Before you dive head first into the decision of buying your first house, carefully assess what purpose the house will serve. Are you going to make it your permanent home, buy it for home value capital appreciation, or redesign the house and put it up for housing or commercial rent, like a “rentvestor”?
The latter model is now common as many Australians have taken such a decisive turn. Rent-vesting allows them to live in places they want while feeling secure in having a property they can call their own. Although there is no guarantee that it will work for everyone because of the risks along with it.
Plan on the How
You would also need to evaluate how you are going to fund such a purchase. Would you slash a significant amount out of your retirement savings? How about inquiring about seller financing? Some sellers would offer such an approach so they can easily sell their rental plans.
Would you take out a conventional mortgage from the bank or the government? Taking out a loan from the bank could mean a liability, a risk inherent to obtaining the funds to buy a home of your own. A lot of options for financing are available, you just have to carefully select which one has lesser risks in the long run, or one with lower interest rates and repayment obligations.
Is a house an asset or a liability?
In finance, an asset is a resource that an individual or entity controls. Its major characteristic is that it produces an economic value or a benefit in the future. It represents a value of ownership that you can convert to cash. Think of investments in securities, goods that a store sells or a manufacturing company produces. The simplest, most common example would be cash. A liability, on the other hand, simply means anything that puts you in debt. It is something that takes money out of your wallet rather than putting money in it.
Is it really a liability?
Robert Kiyosaki claims that a house is not an asset but a liability. This is because a house costs you a mortgage, taxes, insurance, utilities and more. These are things you pay for but will not really give back your money. Hence, a house is a liability.
However, this is not always the case. Think about it. If you are paying a mortgage now, after a few years you will be able to pay all of it off. But if you want to rent, there is a tendency that you will pay a monthly rate that is higher than your mortgage. So, might as well buy a house. Just think of it as if you are renting from yourself. The money you pay for your mortgage is like your income from having someone renting your house. It just happens that the ‘someone’ is yourself.
Plus, if you ‘rent from yourself,’ you do not have to worry about:
Looking for possible renters
Evicting renters who do not pay on time
Paying repairs caused by normal wear and tear caused by your renters
Dealing with potentially destructive and rude renters
Paying maintenance fees
Moving places in case the landlord decides to develop or sell their property
So, what is the take?
Whether a house is an asset or a liability depends on the purpose and how much value, whether tangible or not, you are generating out of it. If we zero in on the process of buying a house, no matter the purpose, you will have to spend first and foremost for its cost of acquisition along with legal and registration fees.
But does it create value like an asset or would it result in just more obligations than you currently have? This should be the top question you have to ask yourself. Remember that buying properties comes at a high cost, moreover, housing is fairly expensive in Australia. Currently, the average housing cost would be about $1.065 million on average. So, it is best that you consider the benefits and choose the option where the benefits outweigh the costs.
The value you derive from your house is up to you to decide. Make it a non-negotiable. It may be tangible in the sense that, for example, it is located near your workplace so you save time and money from a daily commute. It can also bring you intangible benefits such as guaranteed security, a crime-free and peaceful neighbourhood, or a clean environment which definitely creates a positive impact on your well-being.
Costs of Buying a House
For what it’s worth, you have to be aware that buying a house is not a one-time purchase. Besides the purchase price, there are recurring costs and expenses you have to get ready for such as buyer agent, maintenance, utilities, insurance, mortgage payments, and property taxes.
If you lease out your property to commercial business or individual tenants, you would have to incur inevitable costs involved in the tenant turnover process, regular safety inspections, overall repairs and maintenance, and taxes, or you probably might decide to hire a property manager to keep your daily affairs in check.
If you are buying a house for rental purposes or as an investment property, consider these costs in advance and impose a justifiable rental fee for a reasonably high return on investment. That way you can classify your house as an income-producing high-value asset, rather than a liability.
The Bottom Line
You can only tell whether a house is an asset or a liability by looking at the value you can generate from it and the purpose for which it serves. Your house can be your permanent home and still generate value, just not in quantifiable terms. Perhaps, it gives you peace of mind, protects your well-being, or is simply near your workplace and has the amenities you need. That could still be an asset in that it saves you potential costs in the long run.
You could also rent somewhere cheaper or at a place, you prefer while renting out your property at a price high enough for a return on your investment. There are so many business models involving income generation out of renting a house to individuals or commercial entities, but as with everything, it all comes with risks so it pays if you conduct a careful analysis.
Before buying a house, you should take into account many factors such as the main reason behind a huge move, the purpose for which you use your house, and the value you would derive out of such a big investment. These cost-benefit considerations would guide you into whether or not pursuing your purchase, and whether it will serve as an asset or a liability for you.