Is Your Personal Residence an Asset or a Liability?

December 12th, 2022
Investment Property

Homeownership is part of the “American Dream.” In addition to the pride-of-place, the backyard for the kids and the dog, and the opportunity to “keep up with the Joneses,” one of the first finance lessons many of us learn is that a home is an asset. Many families regard their home as the most important asset in their portfolio. 

Is Your Personal Residence a Liability?

Rich Dad, Poor Dad author Robert Kiyosaki famously lit the financial world on fire by describing a family home as a liability instead of an asset. Heresy!

 

But is he right? Let’s look at the arguments on both sides:

“Yes, your home is an asset!”

A home is real estate. Real estate falls under the category of “real asset” — something that has intrinsic worth. It’s not just valuable on paper. It’s a real thing that you can use, like gold or oil. Sure sounds like an asset.

Balance Sheets 101

A balance sheet is a financial statement you use to calculate your net worth. Assets go on one side, liabilities on the other. Liabilities include any loans, accounts payable, or obligations to pay. Subtract the value of the liabilities from the value of the assets, and there’s your net worth. 

 

On a balance sheet, the value of your home goes in the asset column; the balance of your mortgage goes in the liability column. Unless the market tanks and you’re underwater on your loan, the equity is almost always higher than the mortgage. That means that most homes are a positive contributor to your net worth. Still sounds like an asset! 

“No, your home is a liability!”

If the goal is “retirement” — to work until your golden years — there’s nothing wrong with considering your home an asset. It certainly squares with a narrative that most Americans have bought into … and will fight to defend.

 

Your home starts to look less like an asset and more like a liability when the goal is financial freedom.  

 

Kiyosaki defines “assets” and “liabilities” in the following way:

 

    • Asset — something that puts money in your pocket.
    • Liability — something that takes money out of your pocket.

 

There’s no doubt that a home takes money out of your pocket. Mortgage, insurance, property taxes, utilities, repairs … don’t quit your day job. According to industry estimates, a home costs an average of 4-5% of its value to operate every year. In an environment where the home may only be appreciating 4-5% every year, you’re really running to stand still. 

 

Is there a way to avoid this? Not really. Here’s the rub — our need for shelter is a liability, same as our need for food, water, and oxygen. It’s always going to cost us money to live somewhere, whether in the form of rent or homeownership costs. Because of appreciation, owning real estate is often a good long-term financial strategy … but that doesn’t make the personal residence any less of a liability in the Kiyosaki sense.

 

Is there a way to take that same home and make it put money into your pocket?

 

There is — by moving out of that home and renting it out to a tenant! If the rent exceeds the expenses, suddenly you’re putting money into your pocket … and still enjoying exposure to appreciation!

 

Add enough of this rental income to your monthly cash flow, and you can actually replace your work income with rental income. We call this financial freedom — having enough cash flow to cover all your essential expenses, so you never have to work another day in your life if you don’t want to.

 

This is why we think there’s a real argument to be made for taking that money you would have put into a down payment on a home, and making a down payment on rental property instead. It has all the financial benefits of homeownership … plus the benefit of passive cash flow and extra tax advantages. For a deep dive on why you might want to invest in rental property instead of a home, click here.

 

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Whether or not your home is an asset, MartelTurnkey rental properties are definitely assets. We make it easy to add them to your portfolio — without ever having to set foot in them! Click here to see the current assets in our inventory, available for purchase by people just like you. All of them are renovated or in the process of renovation, and many have tenants already in place!

 

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