An asset is anything you own that provides you an economic benefit; current, future, or potential. Any object with a positive economic value is an asset. Your cars, chairs, laptops, currency bills, etc., are all assets to make it simpler. On the other hand, Liabilities are obligations that are a result of past transactions. It involves sacrificing a certain amount of profit in the future to pay off these dues. For instance, the taxes you owe, the mortgage, debt, accounts payable, etc., are all liabilities.
House and the things it can be!
A perfect way to describe a house would be as a sentiment. The majority of the people attach a sentimental and an aesthetic value to the house. In reality, many people buy a home as they consider it a good investment. A house plays a significant role in everyone’s retirement plan, irrespective of where you live; the sentiment is the same everywhere.
Is House an asset?
Now let us look at this objectively from a financial statement and financial planning point of view. Yes, a home is certainly an asset in terms of your net worth. However, when planning out your income statement for the future, your primary house should sit under the expenses column. When you purchase a house, you prepay the money you would have spent on rent and choose a secure and comfortable place to live and retire in. In the process of securing your present and future, you will block a large amount of capital or seek financial assistance for the same.
Are you paying any rent when you buy a house? When owning a house to reside in, you are technically paying yourself rent. However, owning a home is perfectly fine; the American tax code encourages homeownership through their mortgage interest tax deduction. When owning a house, it is imperative to understand that the house does not put money in your pocket; it drives money out of your pocket in the form of running expenses.
Understanding through an example:
An example that strengthens the arguments is a simple game of “Monopoly.” Here in the game, you can buy as many properties as you like, but they only start generating an income when you build a house or a hotel on them. Only then can you start demanding rent. As you create more wealth through rent, you can buy bigger assets to increase your income further. These houses and hotels are definite assets as they encourage positive growth in your wealth.
Is House a Liability?
A majority of the people buy a house as a primary residence and not as a rental property. How does it make a difference financially? Any given month for your personal residence, you have certain fixed expenses, such as a mortgage, utilities, taxes, maintenance, and insurance. However, there can be instances when you need repair work or some unforeseen expenses, like the collapse of your main sewage line or something. All of these will take the money out of your pocket, and liability is anything that takes the money out of your pocket.
Many point to things like paying down principles, appreciation, and tax breaks from a mortgage as reasons why a house is an asset. However, tax breaks from mortgages do not offset the costs you are bound to bear each month. And, banking on merely a possibility of appreciation is not a strong enough reason to consider a house as an asset. The argument here is not whether or not you should buy a house, but instead, whether or not it is an asset. The truth is that a house you live in or a house that is not generating a steady income is not an asset.
Bad Financial Advice; A Liability!
Do you know where you are handed down the worst financial advice? It is your home! The advice is bad not because it is wrong but because it has not evolved with changing times and policies. Most financial advice at home begins with old rules like going to school, saving money, buy a house. But, what no one truly tells you is that maintaining a house costs a fortune, and ultimately you’ll end up earning only enough to be able to run that house suitably. Let alone building a business or diversifying your income opportunities.
Inappropriate assumptions and decisions accompanied by bad advice impact your financial future, making it a liability.
When they say a house is an asset, they are not lying; it is an asset, but Bank’s Asset! Here is how:
- Imagine buying a house, owing X amount to the bank each month, and other fixed expenses. Now ask yourself a question, do you really own the house or the mortgage?
- Take a quick peek at your financial statement! Where does the mortgage go? It goes on the liability side of the balance sheet.
- Have a look at the Bank’s financial statement, and it will appear on the asset side, as the bank receives interest every month. Hence, it becomes an income for the bank.
- Once your house is off the mortgage, you still have to bear the maintenance costs, utility costs, and taxes. This means it will always drive the money out of your pocket!
Don’t allow thinking your residential house is an asset to become your biggest liability!
When you own a house, it can be for two different purposes. One is making it your primary residence, where the house becomes more of a liability than an asset because it requires constant pouring of money from you. However, it still stays on the asset side of your balance sheet since you own it. Secondly, you can buy a house and rent it! Again the house is an asset, but it is an income-generating asset. It adds positive economic growth for you and is generating cash flow!
“Your purpose defines whether the house is an asset or a liability for you; however, it is always an asset in a financial statement.”