Your house is not an asset

It is crucial to end up with this non-sense idea that your house (primary residence) is an asset, probably the only one you will ever own and therefore all your savings shall go into that one asset. Work, ask for a mortgage, pay your house and then retire.

 

 

If a house is taking money out of your pocket (insurance, taxes, miscellaneous, etc.) then it is not an asset. Not only you are actually spending money but also you have to consider the opportunity costs of having our money invested into that house, which you wrongly perceive as an investment, whereas you could have invested the same amount of money in another house or investment that could actually yield at least 5%. In a hypothetical example of a 100k house with an average of 2000 per year on expenses, you are actually spending, per year, 7000 = 2000 + 5 000 (5% of 100k). You have to consider the money you actually spend plus the opportunity cost of not using the 100k in another more profitable investment. Here I have assumed that the other profitable investment would yield an average annual return of 5%, which is very conservative if we consider real estate investment.

In addition, there are also two (hidden) costs which I consider very relevant when you buy the house you live in:

1 – You loose flexibility. Either you assume it or not, it is more difficult to move into another city or country if you know you bought the house you are “supposed” to be living in, not only because you are emotionally attached to it and you probably end up more expensive things for your house, in particular furniture, but also because it is really not that simple to rent a house, get a property manager, etc. from one day to another.

2 – You end up of not making the most rational decisions when you invest in a house with the purpose of living in it. You take into account variables that are important to you and not to the market, like being near your family. Or you are willing to accept living in a area which is not as recognized by the market, like the fact that it is near a highway or a factory, because you prefer to pay a bit less. However, those decisions can make this house a very difficult one to sell or rent to a third party and therefore would not yield any cash flow, in case you decide to rent/sell. In sum, it is a very bad investment.

According to Frank Gallinelli there are 2 rules of real estate investing that we should follow: do not hold any sentimental attachment to any of the properties you invest in and if you think it will be difficult to sell/rent, then it is not worth buying.

 

Another sentence I loved in his book What Every Real Estate Investor Needs to Know About Cash Flow… And 36 Other Key Financial Measures which highly reflects my approach on real estate investing is the following:

You are not buying a properly, you are exchanging a fixed price for an income stream.

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5 thoughts on “Your house is not an asset”

  1. I would disagree in the sense that a paid-off house is an asset because it reduces your living expenses. Even following your 5% example, I’d argue that the savings on rent alone (conservatively $1000 a month, or $12,000 per year) offset the maintenance of a home. The trick is to be in the right area and maintain upkeep to keep the home’s value.

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    1. Hi Brian, thanks for your comment 🙂 I understand your point and I know my view is very controversial! What I would like to stress is the fact that I believe it is more efficient and a faster-track to financial independence to perform investments that actually generate passive income. Your house indeed might allow you to save in rent but it is not an asset in the sense that it does not generate a monthly income. Also, in some cases, particularly mine, I have moved around so much that having a house in a specific location would have limited my ability to chase new job opportunities.

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      1. Understood. I always thought that having no rent payment is equivalent to a monthly income in the amount of rent, more or less. But I definitely agree with those who change jobs or move frequently, which in those cases it absolutely does not make sense to own property!

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  2. Awesome post! I completely agree with this. For me, the easiest way to look at it is from understanding assets and liabilities from Robert Kiyosaki’s book, similar to what you have described on your post. Understanding this concept has worked amazingly for me. I was able to buy 4 rental units (5th in progress) that are generating enough passive income for me to achieve financial indepedence and hopefully retire by 30. I think if I have had put all my money into a single property (paid off), I wouldn’t even be able to set a goal this aggressive to achieve financial independence this early.

    All my rentals have both appreciation gain + passive income. Many people think their house is an asset because of the potential appreciation. But they are only thinking about the appreciation gain and their house is not generating monthly cash flow. As long as your house is not making you money to cover all monthly expenses incurred on it, then it is a liability. Simply maintaining a house and hope for appreciation is just not enough to generate passive income and long-term wealth to quit the rat race faster.

    Thanks for sharing this! Good to see other people with similar mindsets out there! 🙂

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    1. I totally agree with you! But I also understand it is a controversial topic as some people assume that not spending any cash flow on rent due to the fact that you own your house can be perceived as a cash-flow gain. However, indeed, it would be totally impossible for you to own this amount of real estate by now if your goal would be to pay for your primary residence. I will certainly follow your blog to see how you managed to do that so young 🙂 Congratulations!

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