Sterling Heights, MI · Member since 2015 · 14 posts · 4 votes
Hello,
I keep coming across a lot of discussion buying a house and that it is a liability, not an asset. Well if that is the case then when can I buy a house or should I always rent one? Or do "they" mean to buy a house and with my passive income pay for it so its as someone else is paying for it?
Investor · Las Vegas, NV · Member since 2017 · 321 posts · 524 votes
7y
@Antonio Pican When my coworkers buy a house, it is a liability. Why? Because they have expenses every month and $0 in income.
With my house hack here in Vegas, I gross $3,600 a month in rents and have $2,000 in expenses leaving me with $1,600 profit every month. My house is an asset.
It can be one or the other depending on how you buy.
Real Estate Investor · Des Moines, IA · Member since 2016 · 922 posts · 533 votes
7y
The fundamental accounting equation is:
Assets = liabilities - Shareholders Equity
So, it's both!
Well, kind of. If you buy a house for 100k, and you owe 80k on the mortgage, you own a 100k asset, but have an 80k mortgage. The mortgage is really the liability, whereas the house is the asset.
Rental Property Investor · Sacramento · Member since 2019 · 129 posts · 108 votes
7y
There are a bunch of different definitions of the term "asset". My definition is really simple, did it make me any money in the last year? If the answer is no, then to me it's not an asset.
My house costs me money every month, and has not made me any money for the last 10 years since I bought it. I bought my house just because I liked it, and I wanted it, so I bought it. That was not a financial decision. If I was looking strictly at my finances I would not have bought my house, Here is why, I could have invested the money I spent on my house in some syndicated apartment deals and they would have paid me a lot more than the amount my house has appreciated.
I just read that houses on average appreciate 3.7% per year. The goal for most of the syndicated deals I have invested in is around 20% per year. I could take out the rent and keep reinvesting the excess profits. Had I done that I would be several million dollars ahead of where I am now.
So at some point in the future when I sell my house I will be better off than someone who rents an apartment and blows all their money, and the year I sell my house, that year I can call it an asset. However, I will never come close to the person who took their money and invested it in syndicated deals while continuing to rent.
There are a bunch of different definitions of the term "asset". My definition is really simple, did it make me any money in the last year? If the answer is no, then to me it's not an asset.
My house costs me money every month, and has not made me any money for the last 10 years since I bought it. I bought my house just because I liked it, and I wanted it, so I bought it. That was not a financial decision. If I was looking strictly at my finances I would not have bought my house, Here is why, I could have invested the money I spent on my house in some syndicated apartment deals and they would have paid me a lot more than the amount my house has appreciated.
I just read that houses on average appreciate 3.7% per year. The goal for most of the syndicated deals I have invested in is around 20% per year. I could take out the rent and keep reinvesting the excess profits. Had I done that I would be several million dollars ahead of where I am now.
So at some point in the future when I sell my house I will be better off than someone who rents an apartment and blows all their money, and the year I sell my house, that year I can call it an asset. However, I will never come close to the person who took their money and invested it in syndicated deals while continuing to rent.
If you held a million EUR in your bank account, would you also not consider that an asset?
Investor · Las Vegas, NV · Member since 2017 · 321 posts · 524 votes
7y
@Antonio Pican When my coworkers buy a house, it is a liability. Why? Because they have expenses every month and $0 in income.
With my house hack here in Vegas, I gross $3,600 a month in rents and have $2,000 in expenses leaving me with $1,600 profit every month. My house is an asset.
It can be one or the other depending on how you buy.
Professional · Parsippany, NJ · Member since 2013 · 384 posts · 262 votes
7y
The home in which YOU live in a liability not an asset. It pays you nothing and drains money from you daily. Well at least here in NJ where the property taxes on a 2 Bed condo are $6,000/year, $340/month Maintenance and $400,000 mortgage when you can rent it for 2300 and actually invest in something that pays you
Sterling Heights, MI · Member since 2015 · 14 posts · 4 votes
7y
@Brent Shields
Thank you for the explanation. But when should/can you by a house? Is it when you are producing enough and do not care about that liability? Do the pros do it after they have money coming in or do they simply never buy a home and just rent whatever they like ?
Sterling Heights, MI · Member since 2015 · 14 posts · 4 votes
7y
@Spencer Cornelia
Thank you for the response. So do you just rent wherever/whatever you like and will not buy a house? Or would you eventually after producing enough and pay for it using someone else’s money?
Rental Property Investor · Member since 2018 · 826 posts · 810 votes
7y
@Antonio Pican Opportunity costs suggests that you take the down payment for your primary residence and put it into an investment.
However, opportunity costs is applied both ways. If you do not buy a home, you are still renting a place to live, and you end up paying for someone else’s mortgage, insurance costs, maintenance costs, etc... You also lose the benefits of interest and tax deductions.
Less sophisticated investors only focus on the gross income generated, while more savvy investors evaluate the entire net income, inclusive of tax obligations. While a primary residence does not put money into your bank, it reduces how much money flows out of our bank (via tax shields).
Not all primary assets are assets, and many can be liabilities. You’ll have to do the math to figure out which it is. As other posters have noted, it depends on a number of factors.
Rental Property Investor · Las Vegas, NV · Member since 2017 · 134 posts · 93 votes
7y
@Isaac Johnson even when its paid off, it costs you taxes, insurance, maintenance etc. It also costs you opportunity costs, which is the amount of money you could have made if you took some cash out and invested that into something else.
Someone else compared a paid off house worth 1M with $1M in the bank, and my answer would be the same - if it doesnt make you money, it is NOT an asset. the money in the bank is an asset, because it gets at least a tiny return in form of interest. is it a good asset? probably not as an investment - compared to what it could return with a higher risk investment. it could be a great asset as a reserve tho. The money itself to me is not an asset.
Rental Property Investor · Las Vegas, NV · Member since 2017 · 134 posts · 93 votes
7y
@Isaac Johnson
not sure what your point is, of course a paid off house can make money, so can a house with a mortgage - but as long as it produces less capital gain / income than it costs in expenses, its a liability, not an asset in my opinion, and that will be mostly the case in the house you live in.
(Factoring all capital gains, including appreciation and tax benefits and putting all expenses againstnkt to create your net. - if you add opportunity cost loss for a paid off house and the equation can get ugly quick)
Rental Property Investor · San Diego, CA · Member since 2017 · 439 posts · 578 votes
7y
A liability that will morph into an asset. Bottom line is you gotta live somewhere. You ca. Throw money at a house which you can later leverage/borrow against to make other investments. Or.... you can rent. Try borrowing against the apartment you rented for the last 20 years. Let me know how that goes.
Visalia-Fresno, CA · Member since 2009 · 1k+ posts · 863 votes
7y
@Antonio Pican
There are too many variables to this equation. Mapped out a plan on where you want to be in 5 years and work backwards from that goal on how to get there
Detroit, MI · Member since 2019 · 15 posts · 7 votes
7y
@Antonio Pican
I've heard some of the biggest gurus say that you shouldn't buy a house but I completely disagree. For the life of me, I can't understand that. When you rent, you are literally throwing money down the drain because you will never own that house. When you buy, you can pass that down to your kids, grandkids, and so on, which can make life easier. You can also sell a house that you've bought, giving you something in return. Why do you think people buy houses to rent? It makes them money. Well, if they do it right, it can make them money. If someone else can convince me that renting is better than owning, please give it a shot because I would love to understand that way of thinking.
Rental Property Investor · Riverside, CA · Member since 2019 · 42 posts · 5 votes
7y
@Antonio Pican
This question I feel should be directed not at the house but your spending habits...
The reason your home is a liability not an asset is because here is what happens.... example: you rent for $1500 or you can buy for $1500 it’s definitely way better to buy, pay a loan off and have a house worth something vs renting, you never get anything.... but what happens after you get a promotion or make more money you move out and get a house that is $2000 then you go to $2500 or when your house appreciates you refi cash out and spend the money on vacation or a home remodel.... you stretch yourself so thin that you have no extra money and your home is a liability... this is how a vast majority of people do it so that is why their home is a liability. But going back to the first house you had for $1500 keep your payment at $1500 and invest that extra $1000 you make and build assets... you have to live and spend on living so it’s better to buy a house but don’t buy a house that will stretch your finances that you dig yourself deeper in the hole.
Real Estate Broker · Cleveland, OH · Member since 2017 · 719 posts · 658 votes
7y
First of all, you have to live somewhere and renting is paying someone else mortgage.
Then, if you buy house cheap, get it updated while you live there and sell much higher, your capital gain is not taxable up to $250K or $500K for MFJ. You can repeat it every few years, let’s say every 5 years you have $500K in income you don’t have to pay tax on!
So, if your own house made you money - is it an asset? Besides, you can write off your home office expenses from your taxes, deduct your mortgage %% and property taxes if you itemize etc....and if it's paid off - you get HELOC to buy rentals.
It’s a liability only when you buy a house in hot market, overpriced and do updates which is too personal (won’t Ina se the resale value). If you’re an investor, you’ll be smarter than that, at least with your first couple houses, you’ll live in
I was first introduced to the concept of "your home is a liability not an asset," when I read Rich Dad, Poor Dad. At first, I was pretty defensive about it - having recently invested most of our capital into a pricey bay area home.
The more I reflected on it, the more I found it exciting and educational. It opened my mind to a new way of thinking and helped me take the first steps toward a new career as a real estate investor.
That said, our home gained over $300k in equity over a few years of this bull market. Is it still a 'liability?' We got lucky on the market timing. I now think of our home as both an asset and liability. In our market, it wouldn't perform as a cashflowing rental, but it is likely to appreciate over the longterm.
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
7y
Your home is an asset. Your furniture is an asset. Your clothes are an asset. Anything you own that has value is an asset. By value I mean, you could sell it and get cash.
The part people don't understand is just because something is an asset, doesn't mean it is an investment. It also doesn't mean it is appreciating or paying you money. I own clothing that I could sell for less than I paid. That clothing is an asset, but not appreciating. I own gold coins, which are also an asset. They are not paying me money and they could either appreciate or depreciate in value. I would still call them an investment, because I expect them to increase in value prior to selling.
If your home has a loan against it, the loan is the liability. Any obligation that you pay money towards is a liability.
Assets - Liabilities = Net Worth
If all your liabilities were paid off and all your assets were sold, what you are left with is net worth.
The only reason people say your house is not an asset is because of the Rick Dad Poor Dad book, where he stated your primary home is not an asset. He said this to make a point and to change peoples mindset. I am not sure he really intended to redefine accounting terms.
Investor · Los Altos, CA · Member since 2014 · 942 posts · 1k+ votes
7y
@Antonio Pican don't worry if people call it an asset or a liability. The discussion of asset vs liability will go on forever because there are too many variables in every person's opinion. If you go straight with accounting rules it is an asset, but the line of thought in Rich Dad Poor Dad is to think outside of the accounting rules. The bottom line is, does it or will it make you money.
As an example consider 2 different scenarios:
1) you buy a home and live in it but it never appreciates. Potentially the "value" of it goes down. That would just suck...
2) you buy a house and it appreciates a ton. You pull a HELOC out of it and buy additional rental properties that cash flow. That would be great...
Don't focus on the words so much. Focus on the direction the money is flowing.
Rental Property Investor · Sacramento · Member since 2019 · 129 posts · 108 votes
7y
@Tony Kim That's a great question and it represents the problem. Some people would say money in the bank is a great asset. But if someone told me for the last 10 years they have had a million in the bank drawing no interest. I would say for the last 10 years that was not an asset. It could be quickly converted to an asset, but as long as it sits doing nothing, it's not an asset.
@Antonio Pican I need to qualify my previous answer, about renting vs buying. If your looking at buying a house for $100k and you qualify for a first time FHA with a $3k down payment and your monthly payments are less than rent. Then you should buy. I have found deals like this for some of my friends who were renting.
Taking that $3k and investing it is not going to get you that far, and probably is not going to do much better than the appreciation on the house.
Before I was talking about owning a house that is $1 million or more and paying cash for it. That is where it is very clear if someone took that money and invested it, then it would make enough to pay to rent a similar house and have additional money left over each year to reinvest that will far out pace the appreciation you would make from buying a home. If anyone wants details on how that would work feel free to message me.