How Do You Know Whether Your Home is an Asset or a Liability?

Guest Post by Alex Morrison

How Do You Know Whether Your Home is an Asset or a Liability?

Ever since Robert Kiyosaki(1) published his first book on this topic titled Rich Dad, Poor Dad in 1997, the Internet has been awash with blogs and videos about it. In Australia, the book was a big hit because it went to the heart of what many here dream about: owning their home. But is owning a house an asset or a liability?
 

 

What is the Difference Between an Asset and a Liability?

 
The main difference between liabilities and assets is that liabilities are a future burden, while assets bring an economic benefit in the future. Even if you have many more assets than liabilities, a homeowner or business can’t pay its debts or liabilities when they’re due if the assets can’t be converted into money.

 

Is a Mortgage an Asset or a Liability?

 
A mortgage or home loan can be the most effective way to finance a property purchase. But whether the mortgage is a liability or an asset depends on where you stand as the lender or the borrower. A home loan is a financial obligation, a liability, for the borrower. For the bank or lender, it’s an asset because the interest you pay means they get more money at the end of the loan’s term than you paid for the house.

 

Is a House a Liquid Asset?

 
While it doesn’t generate much interest, especially in Australia, with rates so low at the moment, a savings account is a much more of a liquid asset than a house or a work of art.

 

Is My Primary Residence an Asset?

 
Most would say no, your home or primary residence is not an asset, it is an expense. Some people consider their home an asset for retirement, but they are wrong. Very few homeowners sell their properties when they reach retirement age because of the feeling of security in owning it, and the sentimental value. Even if they do sell up and move to a retirement home, they are not likely to recoup any of the value since there are many costs involved in selling, moving and buying the home plus paying the hefty extra service fees retirement villages and nursing homes require.

 

If I Own My Home Outright is it a Liability?

 
Well, it depends. Some say that since you’re like many people in Australia who have most of their wealth ‘tied up’ in their home, it can be seen as an asset. Considering that a liability is defined as something you owe to someone, you do owe the house to whomever you bought it from, and if you’ve paid the loan off, then you owe nothing to the bank, so the house must be an asset. But when you consider what you have to spend to maintain it, the council rates, water rates, insurance, capital gains tax perhaps, and the costs incurred to keep the house safe, then is it a liability? If your home is broken into, there’s the excess you have to pay your insurer, and the cost of a locksmith to change the locks to keep your home secure. So, relatively speaking, yes, if you don’t have the income to support owning the house, it can be a liability.

 

What Value is There in a Mortgaged House?

 
A house does have a value. Whether you attach this value as the price you bought it at or the price at which you think you can sell it, these amounts are what it is worth to you. You can offset the value of the mortgage, which is your liability, with the value of the asset. If you subtract your house (asset) by what you owe the bank (liability) the result is the value of the house. This is called ‘equity’. However, the definition of that word is a bit murky.

 

Now I’m Confused – Who is Correct?

 
You may well ask why so many financial experts say a house is a liability when it is obviously not. Here we come back to finance guru Robert Kiyosaki and Rich Dad, Poor Dad. According to Kiyosaki, an asset is anything that brings you cold hard cash, and a liability is something that takes that cold hard cash from you. He believes rich Dads strive to increase the assets that provide positive cash flow – to Kiyosaki, these are assets – and reduce the assets that produce a negative cash flow – to Kiyosaki these are liabilities. But traditional financiers have a problem with the guru’s strict use of the terms ‘asset’ and ‘liability’ because while your house might be draining your pockets, selling it for a good price means it puts cash back in your pockets.

 
References:
1. https://www.booktopia.com.au/rich-dad-poor-dad-robert-t-kiyosaki/prod9781612680194.html
  

Author’s Bio

 
Alex Morrison has been an SEO Expert for over 10 years. In this time he has worked with a range of businesses giving him an in depth understanding of many different industries including home improvement, business support and health care. He has used his knowledge and experience to work for clients as diverse as Fox Transportable, Cosh Living and Me Bank to help them reach their business goals.

Alex Morrison
Alex Morrison
No Comments

Post a Comment

Comment
Name
Email
Website