Your house is not an asset..
San Diego, CA · Member since 2018 · 5 posts · 14 votes
Your house is not an asset..
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Matt CrusinberryPro Member
Hollidaysburg, PA · Member since 2015 · 327 posts · 350 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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84 Replies
- Rental Property Investor · Union, ME · Member since 2018 · 161 posts · 104 votes8y
Personally I believe that the "your house is not an asset" phrase was developed by Kiyosaki as an overexagerration meant to drive home a point. Yes there are benefits to it, but if your point is to be financially free, your personal residence will never do that for you. At least, not a single unit. If you have a SFH, pay the equity down and put an LOC on it and buy a property, all of a sudden, your primary home is an asset again. Kiyosaki is known for taking literary freedom to slightly grow his points in order to make the general concepts understandable.
Originally posted by @Joseph M.:
I believe the “your house is not an asset “ thing started with Robert Kiyosaki ( rich dad poor dad ) Some say a personal house isn’t an asset since It doesn’t generate income , but in the definition of asset there is nothing that says something has to generate monthly income to be an asset .How long do you plan to stay in San Diego ? What was rent for your unit 5 years ago , 10 years ago? Point is you could be paying a lot more in rent in the near future , I don’t see rents going down or stalling in SoCal .
The house hacking thing of buying a 2-4 unit with an fha loan could be a good thing , if you can find a deal that makes sense .
- Your primary residence is a great inflation hedge if you have a long term fixed mortgage. I worry for the large number of seniors in this country who rent and are on fixed income as their social security won’t keep up with inflation over the long term. Also, we bought our house intentionally knowing that we’d eventually convert it into a rental. Over the last 3 years we got 100k appreciation, and a rental that will now cash flow $600 per month after expenses. Plus we’re able to get a low interest Heloc for additional purchases. Whether it’s an investment or asset depends on your strategy.
- Attorney · Akron, OH · Member since 2016 · 535 posts · 389 votes8y
The notion that your personal residence is not an asset is wrong. While you live in California and may not be eligible for full-ownership, at least there is a prospect of accumulating equity in the property. Moreover, if you research the market area of a prospective home, you should be able to take advantage of an accretion in value through appreciation. You have to review the numbers to see whether it is worth it. Perhaps a mortgage in Beverly Hill amortized over 30 years in a Beverly Hills equivalent is not a smart move, but elsewhere, it may be a fine idea. On the flip side, leveraging your personal residence might not be economical because your debt-to-income ratio may be overburdened for additional lending-dependant investments.
My thought is that if you live in an area where the property values are high, there is more of an incentive to simply invest the funds you'd dedicate to real estate in an aggressive stock portfolio. However, if you have sufficient capital to make those heavy real estate investments, maybe the real estate will outpace your stock opportunities. If you want to seize on those higher real estate gains, maybe out of state investment is for you, but I'd be careful to include a partner located where the property is situated.
- @Kristian A moreno I’ve given this topic a lot of thought and personally, as someone who has both rented and owned while being a landlord, I have concluded that is is usually better to OWN. in our case, looking at the past 4 years, accounting for expenses, we would have been down/spent -$118,200 if we had continued to rent a two bedroom apt in our area, but Instead would be up +$109,324 if we sold our 3 bdrm townhouse tomorrow (after accounting for all expenses over last 4 years and the downpayment). i think if you can buy for less monthly than rent, it is a good bet to buy. Run the numbers and calculate how much you’d pay in rent over the next 5 years and then calculate how much you’d spend in mortgage + taxes and repairs over the next 5 years. Also factor in conservatIve estimated appreciation on your purchase. Pick whichever scenario has the best number. Your rent is fairly low and purchase prices in your area are high, so you might be better off renting?
- Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 31k+ posts · 20k+ votes8y
Originally posted by @Kristian A moreno:
My girlfrIend and I currently rent a 1/1 apartment In San Diego, CA for $1475 ($735 ish each) and I am saving up for my first deal. Considering the high prices in San Diego, should I buy a rental property first and keep paying rent? Or should I buy a property that I can live in first and pay towards something that I’ll eventually own?Take care of home base 1st. Buy your personal home then worry about rentals.
- @Kristian A moreno Renting is not an asset. I would much rather buy my own home, rehab, force appreciation, realize magic of 15 yr fixed amortization (debt paydown) etc. We just relocated and decided to rent, as we research the area. After not having rented in a very long time, I hate having to fight the PM to get the most basic repairs done in a reasonable amount of time. Be the captain of your own ship.
Originally posted by @Will Barnard:
Originally posted by @Bill F.:
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.
I agree 99%, you said what I was trying to say, only much clearly.
The only thing I disagree with is the idea that the home only becomes an asset when you sell it for more than you paid into it. Nothing says an asset has to make you money, appreciate in value, or have positive return,those those are all signs of a good asset, simply that it has some value to someone else. If I sell it for less than I paid for it, then its my equity that takes the hit. After all, it can only be one of three things, asset, liability, or equity.
That's why I think OP is really asking if owning your own home is GOOD asset to have.
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Bill F.:
Originally posted by @Will Barnard:
Originally posted by @Bill F.:
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.
I agree 99%, you said what I was trying to say, only much clearly.
The only thing I disagree with is the idea that the home only becomes an asset when you sell it for more than you paid into it. Nothing says an asset has to make you money, appreciate in value, or have positive return,those those are all signs of a good asset, simply that it has some value to someone else. If I sell it for less than I paid for it, then its my equity that takes the hit. After all, it can only be one of three things, asset, liability, or equity.
That's why I think OP is really asking if owning your own home is GOOD asset to have.
regardless of what is better IE rent and then buy rentals.. as a personal home is not an asset argument.
but when I do my PFS for my bank lines of credit I always put my personal residences on the asset side of the ledger to determine net worth.. I really think for business purposes it really depends on what your trying to do .. for me developing subdivisions and building new construction.. NET worth is were its at and cash on hand.. so for this exercise it does not matter that I might have equity in an investment property or equity in my personal residences they all count the same for Net worth which is one of the major loan covenants one needs in my end of the business.. As a hard money lender over the years.. I have seen many many people with properties but no true equity .
10 or 20% equity in a rental in a non appreciating market is NO equity.. sales costs and such would eat most of that up.. so really its only cash flow.. that is spendable.. just different strokes right.. I think most the people on this site are singularly focused on cash flow and could give a rip about equity or appreciation.. its just how do I get to 10k a month cash flow so I can retire.. and say I quit my job... well lets just say exchange one job for another.
- Ali Boone I feel the same as I would rather rent instead of owning and use that cash to buy a rental but... when you rent you have no control of staying put. Landlord can send you packing when your lease expires or redevelop the property. That’s why owning in a place neighborhood to your liking will be costly but that’s a lifestyle choice.
- Yuma, AZ · Member since 2015 · 140 posts · 137 votes8y@Kristian A moreno i rent out rooms in my personal home. I did not like the liability. But I try keep.month to month Gov't. Employees only.
- Marisa Rowe You can certainly view your property as an asset. There are some markets where the prices do not fluctuate at all. Those properties may have a different effect. The average turnover rate “years homeowner stay in a home” is around 5. Amortizated mortgage rape you with interest in the front end of your term. So banks love it when you move in 5 years and then discharge the mortgage. As a home owners it matters if your home appreciates or not. If it doesn’t then likely you sunk more money into the house then what it’s worth. Viewing your primary residence as an asset is on a home to home bases.
- Investor · Charlotte, NC · Member since 2017 · 791 posts · 479 votes8y
@Kristian A moreno you could do the "house hack" route and buy say a duplex or quad... The other option is to keep renting and invest passively out of state where you can get a way better yield or buy a rental out of state. Depends how involved you want to be and your comfort level.
- 8ySamuel KochPro MemberRealtor · Virginia Beach, VA · Member since 2017 · 11 posts · 3 votes@Thomas S. Very interesting thoughts. I view building equity as a savings account in some sense. With appreciation rates pretty steady from 2%-3.5% I find that keeping money in the bank doesn’t compare as far as building interest goes. In my area it is also typically cheaper to make mortgage payments than it is to pay rent in the same property.
- Investor · Portland, OR · Member since 2013 · 133 posts · 88 votes8y
For a lot of people, a house is an asset and will appreciate over time. It is most people's largest purchase and historically if you look at the appreciation rates, homes will go up in value. True, you can offset that by taxes, insurance and all the maintenance costs that go with it over time. Most people don't factor these in when they think about how much value you they have in their home. But the truth is, everyone needs a place to live and for the average person, buying a home makes the most sense.
I am in the camp that does not view a home as an asset. I have many discussions (arguments) with most people in my immediate circles about this and I am usually the odd man out. I believe that a home is a liability for all the reasons I mentioned (taxes, insurance, maintenance, etc.) I also live in a market that will no doubt continue to rise in value. My home will likely be double what I paid for it in 20 years. However, if we look at inflation at that point it will technically likely not be double. But the main reason I don't consider a home an investment is because MOST people will accrue a ton of equity in the home, only to die with that equity unrealized. A true investment vehicle allows you to capitalize on the return the investment produces. Not so in a home, unless you use a HELOC or other methods to access the equity. Again, most people are not sophisticated enough to use this so this "investment" does them no good. So ultimately, I do not view a personal residence as an investment.
Having said all that, my family and I recently received a notice to move from our landlord after only 9 months of living in a house that we had become quite comfortable in very quickly. It was also in a neighborhood that we loved and had met many neighbors we were quickly becoming friends with. It was a horrible experience. Not only for having to pack and move again, but for realizing that we were not in control of our situation. My wife was crushed. Keep in mind this was after I convinced her to sell our home and reinvest the funds into a mobile home park. She was not happy with me. I was screwed. We had to buy.
Fast forward, we ended up finding a home we absolutely love in the same neighborhood with everything we want in a home. We bought it. Now I wasn't super stoked on it, but I knew it was the right decision for us. The best part about it is we have income producing assets that now PAY for the home. So, just like my residents pay my debt down on my mobile home park, the cash flow from the park that we bought by selling our home now pays for our new home and then some. THIS is how one should buy a home. Then it can be an asset. We will use the equity in our home once we have enough to buy another income producing asset - I will never pay off my house free and clear. It doesn't make any sense.
So...in the end, my recommendation to the OP is to find a play where you can create value. Use it as a stepping stone. House hack, by and renovate, whatever you do buy with the intent to create ea ton of value and leverage that into the next project. Once you have enough equity, find a value add income producing asset that can pay for your next purchase. You will never technically buy your home that way. If I was starting all over, I would buy a 4-plex and fix it up. Live for free and learn how to be a landlord. Then you're off and running. Good luck all!
- Specialist · Indianapolis, IN · Member since 2013 · 3 posts · 3 votes8y
Your house can certainly be an asset, especially if you live in 2-4 unit building that you own and rent out to others.
- Huntington, NY · Member since 2018 · 12 posts · 6 votes8y@Marisa Rowe However, during the idle period of building equity in the home it would be a liability, no?
- Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes8y
Originally posted by @Bill F.:
Originally posted by @Will Barnard:
Originally posted by @Bill F.:
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.
I agree 99%, you said what I was trying to say, only much clearly.
The only thing I disagree with is the idea that the home only becomes an asset when you sell it for more than you paid into it. Nothing says an asset has to make you money, appreciate in value, or have positive return,those those are all signs of a good asset, simply that it has some value to someone else. If I sell it for less than I paid for it, then its my equity that takes the hit. After all, it can only be one of three things, asset, liability, or equity.
That's why I think OP is really asking if owning your own home is GOOD asset to have.
I. Think we are on the same page Bill. When I stated it was only an asset if sold for more, i did not mean that was a definition of asset, but simply a fact that I would only consider it an asset to me if it had equity. Why own any asset if you sell it for a loss, right? One could argue that their home purchased for $100k and sold for $50k is an asset but I would consider that a terrible position to be in and the total assets of that balance sheet would be less than when started. Clearly we all strive for the opposite.
Many mention that renting is cheaper than owning , but in markets with rent growth like L.A and San Diego (where OP lives) that can quickly go away.
I can see renting if one is going to move around the country to different cities for opportunities.
If you are only going to live somewhere for a couple years or so it might not make sense to buy, realtor commissions and closing costs will likely eat up any profit and then some, plus the market could be slow at the time when you need to sell.
@Blake Walsh if you consider a profit of $1,140,000 profit over 16 years this is an increase in value on my primary residence of approximately $71,000 pa. That could be someone's day job.
Then of course Capital Gains tax benefits because it is your primary residence but that is another story, also something to consider
This is what anyone can see hiding behind many of the arguments of the posts in this thread: "I'm really looking for an excuse to put a lot of money into a ostentatious house in an expensive neighborhood as a symbol of my success and live there while I try to convince myself every day that I'm doing the right things to build wealth because my property is appreciating all the time."
Buy the nice house to live in AFTER you get to your financial goals and can afford to pour money down its s***stack. Nice houses come with all sorts of additional expenses and other drawbacks. If you want to live in a symbol of upper-middle-class success, you'd better be prepared to deal with upper-middle-class expenses. If you have to have that house to prove to all the people you know you're a big-shot investor, by all means, have that house, just don't pretend to yourself you're making a wise move.
As for me, Thomas Stanley in The Millionaire Next Door completely convinced me that people who live in those nice houses in those nice neighborhoods tend to spend an awful lot of money they don't have to. I'm a believer in home ownership for myself, sure, but I'm live-in flipping a townhouse condo in a "nice neighborhood" and renovating a duplex I bought for $45,000 on the edge of a heroin ghetto next to the cops to house-hack in after I sell the condo. I'll put on my airs when I can afford them.
The rent where I live is less than an even interest-only loan on the value of the property. The owner has gotten the (significant!) appreciation, and a steady monthly income off their investment. If their children inherit they get a valuable asset with no capital gains. If they sell while living they have to pay capitol gains on a 900% profit, but still it's a 900% profit, after years of rent dividends. I get to live in a house I couldn't afford to purchase.
IMHO people are confusing ASSET (thing of value) with INVESTMENT (thing producing increasing value). Generally most homes are worth more than the mortgage (so they are an asset), though they may not cost less than renting a similar rental home. Long term home ownership has a lot of things going for it -forced savings, inflation-proofing your housing costs, and long-term appreciation. Primary homes also have certain legal protections against seizure that other investments do not, which is worth being aware of as one gets older.
BTW, being in San Diego (like the OP), I'll echo what other posters have mentioned -- there's is a huge disconnect between our rents and our property values that make investing in rental RE here questionable (San Francisco Bay area & LA have similar issues). While our rents may be high ($1500-2,200/mos for an average 2 bedroom apt), our housing prices are even higher.
For perspective, $500k is a pretty deluxe house in most of the country-- you should be able to at least get a run-of-the mill place for that in San Diego, right?
Hah! Here that $500k might get you an unimproved 1950s bungalow in a moderate area of town (say a 2/2 or 3/2 in Allied Gardens or Clairemont Mesa). You'll be looking at 1,000sq ft, no view, small lot, 10'x10' bedrooms, 1.5 car garage. Hopefully everything tidy and well-taken care of, but no discount on price if it isn't, unfortunately. It's a seller's market.
Other $500k options here might be mixed neighborhoods - Most neighbors are OK, but a few are dealing drugs. 1980's 3/2 tract homes, so-so schools, gang tagging, and the crime maps show a lot of petty theft, car break-ins & a few home invasion. Looks OK in the day, but distinctly uncomfortable at night. Still nothing at all under $450k, but likely to be larger houses.
Nice neighborhoods and larger homes and you are in the mid-to-high $500s-700s, depending on neighborhood, bedrooms, lot size, condition, etc. In that range you still aren't talking deluxe homes, just nice middle-class places (teacher, cop, nurse, middle-management types. The cars are Toyota, Honda and a few beloved restored classics, not Mercedes).
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