I own my home outright...asset or liability?

Kent McDaniel · 2018-08-03T07:09:28-07:00

I have been reading “Rich Dad Poor Dad” for the first time and I have to say...mind blown. I always saw my dad as very financially responsible, coming from a very poor upbringing and making a comfortable life for our family. Now I realize two things, (1) I’m not wrong in that thinking, but (2) his conservative ways did not generate wealth, but just allowed him to join the Rat Race and ”make ends meet”. Now, eliminating debt was always a priority of his, and consequently a priority of mine, but I see that there is still much more to the idea of true financial independence, so my wheels are turning non-stop as I try to further develop my understanding of what it means to create wealth, and the many ways of gaining assets while using other peoples money (thank you Bigger Pockets Community!). So, I was thinking about my current situation. I have a good job, am completely debt free, I am living in and rehabbing a wonderful old house that looks down on the Columbia River in Washington State, I own another house about 1 hour away that will become my first official BRRR, and I have a couple other pieces of land that I plan on developing within the next year. At first I viewed my house as an asset, but after reading more in RDPD, I am starting to think that, even though I don’t have a mortgage, this house is still, technically, a liability because it is not putting money in my pocket. Two questions that I’d love some feedback on: (1) Do you agree with the idea that, despite not having a mortgage, my house is a liability? I’m not suggesting that a debt free home is not a justifiable liability, but just that it IS a liability. (2) Does it make sense to put the equity from this home to work for me and use the cash to buy more assets, even if it means taking out a mortgage and increasing the magnitude of the liability? I really appreciate any thoughts on this. I was told about Bigger Pockets a few weeks ago and since then have not been able to shut my mind off. I have flipped several houses over the past several years, but only on a spot basis (take your money and run). I’m changing that strategy now and am eager to learn from all of you. Thanks in advance!

David Bardwell

Rental Property Investor · Brunswick, OH · Member since 2018 · 200 posts · 127 votes

8y

@Kent McDaniel. I think you're right. If your home is not generating income, it's costing you. I presume you still pay taxes and insurance? If you want to accelerate your passive income, tapping into the equity of your paid off home may be a great way to reap the rewards of the hard work that went into paying it off in the first place. Otherwise it's not much different than keeping your money in a low yield savings account. Think about it... The appreciation (or depreciation) is going to happen regardless. Why not have the equity work harder in the meantime?

3 Reply

Michele B.

Vandalia, MI · Member since 2018 · 569 posts · 264 votes

8y

1, The house is a liability you have electric/ gas, lawn care,trash removal , snow and leaf removal, taxes, insurance, and maintenance.

2. It is not making you any money. If your credit is good I would HEL or HELOC or just get a loan on it of any type you want. If you have any family in the military past or present alive or dead there is a great loan out there that is 75%LTV near 4%.

3. Good Luck you will do fine just make sure your numbers match up, and you are profitable.

Tag me if you need any questions answered/

7 Reply

Rob Lee

Rental Property Investor · Toronto, ON · Member since 2018 · 9 posts · 8 votes

8y

1) Yes of course. 2) Depends. Leverage is a two edged sword. Used wisely its a great tool to increase income and wealth, used unwisely it can take you backwards.

The way I look at your situation is not from the point of view of having debt or being debt free but rather that while you have assets what happens to your stress level if you lose your steady source of income? You have assets but they don't generate you ongoing income.

I think you should look at investments that can provide you an alternate source of income, so stocks and bonds, and buy and hold rentals. Sometimes you need leverage to create that alternate source of income....that's likely what was suggested in your RDPD books. I'd recommend you educate yourself on both those alternatives. I'm much in the same boat as you and that's what I'm doing.

Just my $0.02

0 Reply

Grant Rothenburger

Investor · Taylor Mill, KY · Member since 2016 · 2k+ posts · 964 votes

8y

@Kent McDaniel

1) it doesn't put money in your pocket and costs you money (insurance, taxes, maintenance, repairs, etc.). Liability

2) Absolutely leverage the equity for investment properties. Even if you use leverage to purchase the investment you can use cash for rehab or vice versa or do all cash if you wish.

4 Reply

Dennis M.

Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes

8y

@Kent McDaniel Stop paying your taxes and you will find out real quick if it’s an asset or a liability

14 Reply

John Barrett

Rental Property Investor · Everett, WA · Member since 2015 · 457 posts · 386 votes

8y

@Kent McDaniel your personal residence is a liability in the sense that it takes money out of your pocket monthly to run. That said, I look at a little different than others as not having a mortgage does provide you benefits (peace of mind and stability). You need to determine if what you are buying every month with not having a mortgage on your home provides you more value than the return you can get if you investing the money elsewhere. As someone a lot smarter than me said, “Price is what you pay, value is what you get”.

7 Reply

Arlan Potter

Investor/Accountant/Builder · Meno, OK · Member since 2014 · 1k+ posts · 918 votes

8y

I have read "rich Dad poor dad". I love his wealth building philosophy, I am an investor in buy and hold rentals. I own boatloads of cheap rentals.

I built my house debt free in 1992 with the proceeds from the sale of the first two houses I built for myself in earlier times. I was 33. No house payments for 26 years. I would never borrow against it. There is something about no house payments.

26 Reply

Kiley N.

Honolulu, HI · Member since 2017 · 231 posts · 191 votes

8y

Asset

3 Reply

Jim Grutkowski

Conroe, TX · Member since 2018 · 8 posts · 18 votes

8y

There are clearly two distinct and rational viewpoints on this, and each one is valid. One can take either side of the argument and make a compelling case.

That being said, I would be reluctant to borrow against my home unless two things were in place: I had enough steady W2 income to pay on the new note (i.e. I could sleep at night knowing my home was safe), and two I was confident in my ability and training to properly leverage the equity through a new investment. Although it is clearly not earning you income, having the peace of mind of being debt free goes a long way.

4 Reply

Bryan O.

Specialist · Lakewood, CO · Member since 2014 · 1k+ posts · 1k+ votes

8y

@Kent McDaniel you already know asset vs. liability. What you need to understand now is opportunity cost and arbitrage. If you can get a line of credit on your home for 5% and you can use that money to generate a 10% return (arbitrage), then you are losing money every day you do not act (opportunity cost). If you have no upcoming deals or other opportunities then your line of credit may be losing you money (depending on the cost of its existence).

Generically, yes, your house is costing you money and when used wisely debt is one of the greatest ways to generate wealth. Some people prefer to have their primary always paid because it lets them sleep better at night; some people want that liability to become an asset... that goes deeper into your personal preferences and is something you would have to answer on your own, mathematics aside.

Best of luck!

8 Reply

Matthew Paul

Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes

8y

Borrowing against your home is great .................Until things go wrong all at once .You lose 4 out of 5 tenants , 3 of them trash the properties . The major employeer in the area moves , you lose your job and the tenant pool dries up . The kids need braces and the car dies all in 1 month .

Me I like having a house payment I can make driving a trash truck . I sleep good at night

4 Reply

Frankie Woods

Investor · Arlington, VA · Member since 2012 · 1k+ posts · 491 votes

8y

I hate the argument that if you stop paying taxes you'll see that you have a liability. The same can be said about any investment property that you own. If your house is appreciating, it is, in my mind, "putting money in your pocket". The fact that you can take out a HELOC or refinance cash out tells me that you can put money in your pocket. It's all relative. There are several philosophies on BP about having free and clear properties vs. making your money work the hardest for you. Both are right. It depends on your situation. From what I've gathered, it seems your in the growth stage. In that case, I would pull money out when you find a deal that makes sense. The market is pretty hot right now in many, if not most, markets in the country. So be careful. I'm in a similar situation. But I refuse to be a "Dave Ramsey" or "Rich Dad" camp. I make my own decision. Best of luck in whatever decision you choose.

8 Reply

Tyler Weaver

Investor · Cincinnati, OH · Member since 2008 · 319 posts · 243 votes

8y

Dead equity. It is not doing anything for you. Sure is a liability, but life is full of liabilities. I like to think you should not allow it to overwhelm your finances. If it does, sell it and rent somewhere. A Heloc is likely a good practical move to get access to the equity.

2 Reply

Hai Loc

Specialist · Toronto, Ontario · Member since 2012 · 2k+ posts · 891 votes

8y

@Kent McDaniel I used to have the mentally of maxing out all your properties at 75% LTV including primary residence as long as whatever you are putting that investment dollars into nets a reasonable profit like 5% interest on loan and gaining 10% on investment.. As long as you are winning on your net who cares right? Not so fast.. But it depends on the "can I sleep at night" factor kicks in.. If there is one property I choose to be free and clear it would be my primary residence. Nobody can tell you to move for any reason.. No bank no lender.. As for my investment properties I could care less.. They foreclose and worst thing is I have my home where I can sleep at night and work at McDonald's. Another factor is what % of that property is to your net worth? If it's most of it would you max out 75% LTV? I wouldnt.. My sleep at night debt ratio is 1:1. Basically I do not want more debt than equity so as long as my debt is less than 50% of asset value I am good.. I feel pretty protected with that much equity or less debt.. Don't get me wrong I would acquire assets using 75% LTV knowing that I own other assets that have plenty of equity to keep my balance..

5 Reply

Jabari Long

Real Estate Broker · Detroit, MI · Member since 2014 · 384 posts · 149 votes

8y

@Hai Loc it’s a liability unless you are using the equity to generate income.

0 Reply

George Pauley

Chandler, AZ · Member since 2017 · 174 posts · 269 votes

8y

What @Bryan O. said about arbitrage is spot on. Do the math and the math tells you what to do. But...

Yes your home is a liability. But so are your groceries and utilities. You have to eat, and you have to live somewhere. You're home is a special liability that you can't escape. Its not a doo-dad as Mr. Kiyosaki likes to call frivolous expenses.
One of the things I like about Bryan O's example is it's VERY typical. Mortgage the house for 5%, invest for 10%, and make 5% on the arbitrage spread. A lot of folks might not be too comfortable risking their home on a 5% spread. If you are, great! But if you're not comfortable, well 5% aint that much. You're not being TOO conservative. Just more conservative than others.

3 Reply

Shahriar Khan

Investor · Houston, TX · Member since 2010 · 234 posts · 145 votes

8y

@Kent McDaniel it all depends how you view your house:

Scenario A ( Its an asset)

Lets assume your home is your castle and it needs to be protected at all cost independent to what happen outside (i.e. loss of job, bad investments etc)

Scenario B (Liability):

You are loosing it outside your fort and only way out is be using the bricks from your fort OR your winning it and you wanted to make sure you can expiate the process if you use the bricks of your fort. In both cases you dont mind being fortless king :)

Hint:

1) Everyone here are trying to have supplementary income to replace and/or add to existing income source which is beyond covering monthly expense. In your case you have lower monthly expense (i.e. No monthly payment)

2) To cover 50% loss you need gain 100% ..

0 Reply

Yavor Tomov

Rental Property Investor · Houston, TX · Member since 2013 · 79 posts · 20 votes

8y

Hi @Kent McDaniel First, congratulations on your financial situation. While you may have not used your money to the best case scenario it does not matter. What matters is to learn, improve and feel comfortable taking risk. If I'm in your shoes I would definitely take some/none of the equity out of your primary residence but for sure will get approved for a loan. Few reasons: 1. You would get an amazing interest rate. To buy/rehab more properties. 2. Asset protection. An equity line of credit loan would be perfect. So even in the case you do not need money at this moment get the loan, so if any lawyer checks your assets they will see a loan on top of your primary residence. Nevermind you have not pulled a dime from the loan and you are not paying any interest. Some bank may require for you to make a small withdraw on approval. Hope this helps All the best.

0 Reply

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

8y

WEll this is generally speaking a buy and hold investors rich dad poor dad PRO site.. so you replies will mirror that thought process.

I think you have to take your home base and set it aside.. Most people that retire in style do so because their home is paid for think of the milliions of Californians that did so and now us in the Northwest. those that are commenting from fly over country were there houses might go up 20k in 10 years I get that.. they look at homes much different than we do on the west coast. Or at least in the Major MSA's on the west coast and your in one of those..

And it depends on your age and your earning power..

To me your to be commended your dad was smart and leave the home base alone you want to go wild with debt on your investments that's a choice. And for 90% of folks you need debt to scale..

@Sharad M. this young man that I tagged came here from a foreign land.. and he paid cash for all his rentals.. and now owns I think last time we talked about 50 of them free and clear.. now that's the way to do it.. Hands down.. I have so much respect for how he did it. But that is the goal its not the number of doors its the number you have paid for.. that's when you really have it made.. plus his cash flow on his portfolio is probably as great as someone who owns 200 or so doors and is in massive debt.

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12 Reply

Sam Shueh

Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes

8y

1 easy way to tap into your home all paid for is getting a HELOC.

0 Reply

Steve Vaughan

Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes

8y

Congratulations first of all. Owing nobody on any asset is an accomplishment not many in our country share.

I think your home is an asset for sure. It may not pay you (I have an ADU so mine does) but it keeps you from having to pay rent and insulates you from LL risk like rising rents or them selling and forcing you to move.

Even I have a Heloc though. Has to be the lowest cost of capital out there. The total cost was less than $400 to establish. I haven't used it yet, but my last cash rental purchase had closing costs of $471 all-in. Having cash saved me at least $5k.

If I was still in a growth phase, I would put a Heloc on my primary. So many advantages to buying investment property with cash. If I wasn't growing anymore, I'd leave it paid off and just not have payments anymore. Your opportunity fund will grow amazingly fast without payments!

7 Reply

Edward Cervantes

Rental Property Investor · AZ · Member since 2018 · 36 posts · 37 votes

8y

Traditional accounting would say "an asset", but a thoughtful investor would say "a liability unless it generates income".

3 Reply

Paul B.

Rental Property Investor · Dallas, TX · Member since 2015 · 501 posts · 504 votes

8y

Originally posted by @Michele B.:

1, The house is a liability you have electric/ gas, lawn care,trash removal , snow and leaf removal, taxes, insurance, and maintenance.

Question for all, not just you...if the costs of keeping your home make it a liability, should you also account for the cost of renting a comparable home if you didn't own it?

If your house costs you $300/month for taxes, maintenance, etc., but you love your home and a similar place would cost you $2,000/month to rent, even though the house isn't literally putting any money in your pocket, owning it means you're not paying $2,000/month. So you are getting that much value every month. I'd say you're netting $1,700/month by owning. Of course, there are other numbers to take into account if you want to get more precise, like appreciation/depreciation, plus the opportunity cost of the dead equity....but to say owning a house is purely a liability isn't totally accurate.

5 Reply

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

8y

Originally posted by @Paul B.:

Originally posted by @Michele B.:

1, The house is a liability you have electric/ gas, lawn care,trash removal , snow and leaf removal, taxes, insurance, and maintenance.

Question for all, not just you...if the costs of keeping your home make it a liability, should you also account for the cost of renting a comparable home if you didn't own it?

If your house costs you $300/month for taxes, maintenance, etc., but you love your home and a similar place would cost you $2,000/month to rent, even though the house isn't literally putting any money in your pocket, owning it means you're not paying $2,000/month. So you are getting that much value every month. I'd say you're netting $1,700/month by owning. Of course, there are other numbers to take into account if you want to get more precise, like appreciation/depreciation, plus the opportunity cost of the dead equity....but to say owning a house is purely a liability isn't totally accurate.

And the mother of all Tax treatments the 500k tax free FREE when you sell or 250k single.. this is where folks in high appreciating markets make some great gains.. now I agree you can 1031.. but once you start taking depreciation you can never cash out unless you keep rolling up debt.. or pay recapture. that 500k is a massive bonus to home owners going into retirement.. they can take that and buy notes or lend money and easily make 10% a year 50k and not have to worry about recapture and no debt..

Like I said I get this thought process when you own a home in Kokomo or Muncie or some little town in rural Illinois or Rochester buffalo etc.. were values peaked 20 to 30 years ago and have eroded and the only reason they have rebounded a little is this craze to own these as rentals..

But when you buy in Markets like the west coast were many properties have gone up 500k in the last 3 years think Seattle SF parts of LA Austin and other east coast markets I am not as familiar with.. but that to me is just a huge reason to own that home to live in.

I live in a pretty nice place in Lake Oswego and my payment is far less than rent.. So your point is very well taken for my personal situation and my home is just about paid for. I think its just a nice safety cushion as well.. I bought my retirement home a little over a year ago and paid cash for that.. but like most would say its dead equity but I don't care.. I like the safety.

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6 Reply

Account Closed

Rental Property Investor · Seattle, WA · Member since 2018 · 129 posts · 163 votes

8y

@Kent McDaniel Congrats on achieving a milestone. Owning a home is a great accomplishment. As some other REI have stated, your home is an asset in terms of your net worth but due to overhead, and taxes it has liabilities. I would suggest having a strategy and discussing this with your spouse. I have found that while you may think it’s a good idea to leverage the equity to acquire assets, your spouse may think otherwise and would value security. Also think about your “why”, what will keep you motivated to work through issues. Using a HELOC is a good idea, but you’ll want to assure your strategy has risk management. I use my HELOC when I’m 99% certain the line can be paid off in

2 Reply

I own my home outright...asset or liability?

I own my home outright...asset or liability?

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