It is a popular belief that a home is an investment, because it increases in value over time!
But, are you sure that this is true?
What about the crisis in the real estate market with prices that fell in absolute terms such as the one in 1997-98, when prices fell by 40% in less than 5 years?
However, it is not the drop in the prices that is the main problem.
This is why your house is a liability and not an asset
First, let’s look at the definition of assets and liabilities. A good definition, simple and effective is this: an asset is something that brings money into your pocket; a liability is something that takes money from your pocket.
If you prefer, assets generate positive cash flow; liabilities generate negative cash flow. With assets you are in the blue; with liabilities, you are in the red.
An example of an asset is a profitable business. Each month the business brings money into your pocket. (I omitted speaking about properties and you will understand why soon).
An example of a liability is a loan, with monthly repayments. Each month liabilities take money from your pockets.
What about your house?
By this definition, home ownership is clearly a liability. It takes away money because of the mortgage, maintenance costs and taxes.
Many people struggle to accept this concept. I see this when I explain it during my seminars on Financial Freedom. However I also see that then, after giving an explanation, the concept is clear and obvious, even if is new.
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If you think that your house – which clearly takes away money from your pocket – is an asset, then your car, home appliances, jewelry, anything you have bought (perhaps in installments) are assets.
But I repeat: an asset has nothing to do with possession, with “stuff” but only with the fact that it brings money into your pocket.
For example, the books I’ve written are an asset for me even if I don’t have them (I don’t own the publisher and the books are distributed in bookstores) I make money from them.
“If I pay rent, aren’t I throwing money away?”
This is the classic objection that my students make during my seminars, and it is an understandable objection if you believe that the very fact of “having” a house is an asset.
Something that puts money in your pocket is an asset. I believe homeownership is a liability.
What about the rent? At least with a mortgage then I have something left.
Of course, but it is a debt for most of your life. The house that you live in that you bought with a mortgage is not yours; it belongs to the bank that lends you the money.
The debt you pay each month to pay the rent and the debt that you pay each month to pay the mortgage of your house is not the same thing.
The first is a good debt, the second a bad one. It would seem to be the opposite, right?
The fact is that paying rent gives you the ability to apply for a mortgage for your property investment.
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A bank is willing to give you a loan for a house – maybe as a first home. But if you already have a mortgage, it is very difficult, if not impossible, to get another one.
Renting a house allows you to have investment funds to create your financial freedom.
You can have a roof over your head and, at the same time, maintain the ability to make a good debt, i.e. the one for property investments.
Why is buying a house for an investment an asset? Because it brings money into your pocket, or because you can resell it at a better price or because you get rental income.
Today I wanted to clarify this key point which is, in my opinion, one of the most important real estate investment concepts for financial freedom.
So is your home ownership an asset or a liability? Now you have some more information in order to respond.
To your financial freedom,