Your house is not an asset..
San Diego, CA · Member since 2018 · 5 posts · 14 votes
@Kristian A moreno, If you're just starting out, and you want the biggest bang for your [investment] buck... I suggest you house hack. You will get both of the same world. Look for duplexes, triplexes, or quad-plexes as your first investment, and later on as they are putting money into your pocket you can refinance that property into a full time rental. This will also be beneficial in many different aspects of real estate (i.e. managing rental properties). It's a win win for you, and give you time to save up extra money. Good luck and I hope this helps.
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@Kristian A moreno, If you're just starting out, and you want the biggest bang for your [investment] buck... I suggest you house hack. You will get both of the same world. Look for duplexes, triplexes, or quad-plexes as your first investment, and later on as they are putting money into your pocket you can refinance that property into a full time rental. This will also be beneficial in many different aspects of real estate (i.e. managing rental properties). It's a win win for you, and give you time to save up extra money. Good luck and I hope this helps.
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I am a big fan of house hacking but to add the icing to the cake the house hack should have a value add. Some things to consider:
@Greg Gaudet I do not know if Kahului has detached multiplexes but where I invest there are detached multiplexes that look like SFR. They typically have their own yard (often fenced), entrance, gas meter, electric meter. Typically the only way to tell that they are a multiplex is that they typically share a single water meter. Maybe your fiancé would consider the detached multiplex option.
Good luck
Hey Dan,
Yep, SFHs with "ohanas" are the norm here. Typically many of the SFHs here have a 500-600 sq ft 2/1 or 1/1 cottage (called an Ohana because I guess they used to be for family to visit - but now everyone rents them because of the high cost of living).
My plan for a long time was to live in an Ohana and rent out the main house, until whenever I needed to bigger house, then switch and rent out the Ohana. But my fiancé had long time plans to move her parents here and live together. So we bought a half acre lot and built 2 SFHs, one for us and one for her parents, we're moving in 2 weeks. The lot is zoned R-3, which allows us to have 2 SFHs and an Ohana, so of course that's what I wanted because the Ohana would've cost us $750 a month if we financed the whole thing (because we already paid for the land) and it would rent out for $2,000+, so it would have provided over $1,200 in cash flow - half of our mortgage! But her parents are "coming here to retire and don't want tenants living with them". I'm hopeful that after living here a couple years they will realize that this is just how everyone lives here... Maui is expensive and if you want to live in paradise you have to find ways to offset the expenses.
Yeah that seems to be smart to add an ADU and rent out . I believe San Diego is the only large city in CA that doesn't have rent control . I imagine there are long time landlords that haven't updated units , although probably hard to find those properties on market in this market .
In L.A there is rent control but I’ve heard of people buying out the tenants , this seems like kind of a gamble but of course if one can say double the rent even if you are paying the tenant a big payment to leave .. say $30k .. then it would be well worth it because the net income of the building would go up .
If a house appreciates at a suitable percentage it's an asset.
I have to stenuously disagree. Please show us anywhere via a legit source that defines an asset of a home as one that has "suitable appreciation".
There is a lot of opinion in this thread about your residence being an asset or not and most of the opinions expressed are in conflict with the full and accurate definition. Be that as it may, there is certainly some grey area as well as factors dependent upon which side of the balance sheet you are on.
For me, an asset puts money into my pocket and a liability takes money from it. My personal residence, regardless of equity and regardless if one day it is paid off, it will always take money from my pocket as I have taxes, insurance, and currently, mortgage interest. It produces no positive income and as such, it costs me money thereby being a liability to me.
The next argument was that you can pull equity via a loan and get cash to invest in an investment property. That is all fine and good and I do it just about every month so I am well aware of that ability and process, however, for my personal residence, it still remains a liability as that cash out refi or HELOC costs me money via interest and loan fees. By being smart and investing in an asset that produces income above the expenses, the end result of that investment is an asset but not the personal residence.
Yeah that seems to be smart to add an ADU and rent out . I believe San Diego is the only large city in CA that doesn't have rent control . I imagine there are long time landlords that haven't updated units , although probably hard to find those properties on market in this market .
In L.A there is rent control but I’ve heard of people buying out the tenants , this seems like kind of a gamble but of course if one can say double the rent even if you are paying the tenant a big payment to leave .. say $30k .. then it would be well worth it because the net income of the building would go up .
The flaw in your thought is that the rent control affects both the market and rent appreciation. So you buy the tenant out at $30K (using your value) but you are capped at rent hikes. The last 3 years resulted in average SFR rent going up $500 in San Diego. So in as little as 3 years, if the 3 years were like the last 3 years, the rent is close to $500/month below market. Do you then do another buy out? Maybe you decide to sell but your property appreciated less than the property without the rent control. Either way the rent control is affecting your return.
I see few scenarios where purchasing rent controlled unit has a better long-term ROI outlook than the non-rent controlled unit. The rent controlled RE will have a lower entry price but it is likely to have significantly less appreciation (market and rent) and few paths to increased positive cash flow. Compare the rent controlled RE to a SFR purchase made 3 years ago in San Diego (no rent control) that, if cash neutral at purchases, is now cash flowing close to $500/month.
The ADU combined with the recently passed San Diego STR regulations could make the ADU a great STR. The new STR regulations, if they ever get enforced, would limit STRs to RE that is owner occupied. In San Diego county this is also the primary limitation placed on ADUs (secondary is that it applies only to SFR, you cannot add an ADU to a duplex for example). If the new STR regulations get enforced, the supply of STRs will get drastically reduced. We know San Diego has a great demand for STRs. This provide an opportunity for house hackers. The ADU is a less expensive means to add an STR to an owner occupied RE. The ADU combined with STR (especially is the new STR regulations ever get enforced) appears to be an outstanding value add that is available, in San Diego county, only to house hackers.
Good luck
Where does my Berkshire Hathaway stock fit into your definition of an asset? It doesn't put cash in my pocket, so its not an asset? It doesn't cot money so it can't be a liability?
You do bring up brings up a good point, what is an asset? According to Barron's Finance & Investing Handbook 8th Ed.
Obviously a home is an asset under this definition; it has value. That value may be less than you paid for it though.
The liabilities associated with it are, tax, insurance, mortgage, repairs & Maintenance, mortgage... ect.
Depending on the magnitude of the liabilities and when the owner decided to exchange the asset for another (sell it for cash) will determine if the return is positive (make money) or negative (loose money)
So, the question that OP is getting at isn't really is your primary residence an asset, but will a primary residence have a positive return compared and how does that compare to an investment property.
The answer to that is a resounding, it depends.
@Thomas S. a house is not an asset but a liability if you do not know how to use leverage and the free money it gives you. Thats the point of Robert K in saying that. Most are taught wrong that just having a house with a mortgage is an asset. In this situation it is a asset only for the bank and a liability for you the owner. BUT, if you use its equity and leverage it, then you now have an asset and money to invest and hence an asset. Depends on its use. Another way to say what @Jay Hinrichs is saying. And the house hacker is another way to turn your liability into an asset. Just have to shift your mindset.
Housing hacking in southern California is very hard to do. Our version of house hacking is renting out a room at +$1,000/month. I am of the mindset that a primary residence is not necessarily an asset, but it can be. I believe that my home is an asset for the two following primary reasons. 1) We have substantial equity in our home which we tap into via a line of credit. We then use the line of credit to buy properties that yield a significant spread over our cost of capital. 2) My wife is in residential sales. We built our house from the ground up, so she uses it as a resume to be able to demonstrate her knowledge of renovations/capability in design. Bringing clients to our home has generated significant sales volume.
My main point is that buying a home for the sake of buying a home isn't necessarily the best use of funds, but with some creativity you can re-position a liability to an asset.
House hack, you might not be able to find a multi in san diego but I'd consider getting roommates or airbnb a room or two for the first couple years. Then look for an out of state market and start buying there.
By that time you could have enough equity in your personal house hack to get a HELOC. Then you can really move on deals. Good luck!
- Mike
@Dan H. , prices of rent controlled buildings in L.A have appreciated very significantly though over the past several years. Rents and cash flow of rent control prices of course haven't gone up more than allowed minimal increases yet the properties are selling for a lot more. A lot of these multis are being sold as redevelopment plays it seems. The city seems to be prioritizing anything near public transit for higher density due to the housing shortage.
It seems almost every muti listing states "possible redevelopment opportunity" which isn't typical in much of the country of course.
That is interesting about the ADU /STR situation in SD.
I've seen companies advertising converting existing garage space to livable space , although I don't know the legalities or if a garage can be legally rented out if it's converted that way.
Definitely seem like there will be an increase in people wanting to rent out space in their home short term especially if prices/mortgages continue to go up.
@Brian Bradley , I wouldn't say that using your home equity is free money though. When you take out a home equity line or loan against your home you are still paying interest on that loan. But of course at least you have the option to borrow that money...unlike with renting.
The Rich Dad , Poor Dad book appears to be published way back in 2000. Way before Airbnb or these newer laws that allow ADU units.
I wonder if Kiyosaki wrote the book today if some of the content would of been different..maybe he would of spoke about Airbnb or building an ADU on your residence to turn into an income generator.
@Kristian A moreno , I just thought of this..but I have done some reading on the HomeReady loan from Fannie Mae
It's a loan that allows you to put 3% down which is .5% less than FHA..and also allows border income and rental income. Might be something you want to look into.
https://www.fanniemae.com/singlefamily/homeready
@Dan H. , prices of rent controlled buildings in L.A have appreciated very significantly though over the past several years. Rents and cash flow of rent control prices of course haven't gone up more than allowed minimal increases yet the properties are selling for a lot more. A lot of these multis are being sold as redevelopment plays it seems. The city seems to be prioritizing anything near public transit for higher density due to the housing shortage.
It seems almost every muti listing states "possible redevelopment opportunity" which isn't typical in much of the country of course.
That is interesting about the ADU /STR situation in SD.
I've seen companies advertising converting existing garage space to livable space , although I don't know the legalities or if a garage can be legally rented out if it's converted that way.
Definitely seem like there will be an increase in people wanting to rent out space in their home short term especially if prices/mortgages continue to go up.
I am not indicating that rent control have not appreciated. I am stating they have not appreciated as much as the non-rent control units. If they had appreciated the same, the rent controlled units would not be less expensive than the non-rent controlled units.
Garages can be converted to ADU by Ca ADU rules (so all areas).
The value of your home, at least to the extent it remains unencumbered, is what you use to determine your net worth, in part. Once you sell the property, your net worth might be slanted up or down depending on your interest in it and its sale price (sometimes its market value). Sometimes, as we saw in 2018, many people held a liability not an asset when the sold (or lost their home) and their net worth turned negative. I, personally, do view my primary as an "asset" and it does represent, for me a large part of my net worth currently. The cycle we are in obviously affect this at time of sale.
If I rented, I could not include my rental property as part of my net worth.
Its amazing how many people actually think their home is an asset. Its a complete risk. But those are usually the people that think INSIDE of the box.
Where does my Berkshire Hathaway stock fit into your definition of an asset? It doesn't put cash in my pocket, so its not an asset? It doesn't cot money so it can't be a liability?
You do bring up brings up a good point, what is an asset? According to Barron's Finance & Investing Handbook 8th Ed.
Obviously a home is an asset under this definition; it has value. That value may be less than you paid for it though.
The liabilities associated with it are, tax, insurance, mortgage, repairs & Maintenance, mortgage... ect.
Depending on the magnitude of the liabilities and when the owner decided to exchange the asset for another (sell it for cash) will determine if the return is positive (make money) or negative (loose money)
So, the question that OP is getting at isn't really is your primary residence an asset, but will a primary residence have a positive return compared and how does that compare to an investment property.
The answer to that is a resounding, it depends.
You stock in Berk/Hath or any other stock is an asset on your balance sheet, no doubt about it. I realize it does not put cash into your pocket, except for dividends (so I guess it actually does) but cash in pocket is not the only measure of an asset. So long as it holds value that you can trade for cash.
With the primary residence debate, the home is an asset - for the bank and only for you if and when you sell it for more than the cost basis plus costs to sell/hold.
Thank you @Will Barnard. Saved me some typing, and more clearly written then what I likely would have penned.
IMHO house prices vs incomes are out of whack (ie the average family can't afford the average house). I think we've had a spiral going on (high property prices drive high rents which drive high property prices), with a good economy but limited new housing coming onto the market.
The only way I think buying right now makes sense is if you;
a) have a very good, stable, recession-proof job
b) would be comfortable with holding for a very long time if needed
c) can figure a way to make the house profitable -- renting rooms, or dividing part of the house into another unit (or an area that functions as one). As far as I know, nothing prohibits you from partitioning off a portion of your home & renting that to a "roommate" with whom you share no living space (a bathroom, bedroom, & den that are accessed via the patio, with a kitchenette with microwave, for instance).