We often think of owning a home as acquiring an asset. However, that’s not necessarily the case. In some cases, a home can be an asset (like if your renting a room out), but most of the time its actually counted as a liability.
But, to answer the question, we need to consider a few variables.
Considering that you acquired your home somehow, the nature of the circumstances of how you did so determines if your home is an asset or a liability.
In this article, we will explore how owning a home can sometimes be a liability and an asset at other times and how to make the distinction.
What’s an Asset?
To put it simply, an asset is any sort of tangible or intangible property that you own that generates profit. Suppose you have an apartment that you rent; in that case, that apartment is an asset because it puts money into your pocket every month. The apartment can also be sold for a profit, considering how the real estate prices are often on the rise.
Generally, there are two types of assets: personal assets and business assets. A personal asset is owned by an individual, while a company or corporation owns a business asset.
Assets can range from a stock share to real estate, a copyright license, or even a digital asset — digital assets are quite popular nowadays in the form of NFTs (if your interested, we wrote an article introducing NFTs).
The most important keyword in what defines an asset is “investment”. Most people who want to buy an asset do so because they believe it’s a good investment.
What’s a Liability?
On the other hand, a liability is any sort of financial obligation that you have to pay to outside parties. There are three major types of liabilities:
- current liabilities (short-term) that must be paid within one year,
- non-current liabilities (long-term) that are due in more than one year’s time,
- and contingent liabilities that only need to be paid only under some circumstances.
The most common type of liabilities is in the form of a debt that you have to repay. For example, when you take a loan from a bank with interest to buy a car, that car becomes a liability. Even more so if that car keeps breaking down and needs repairs.
How to Distinguish Between an Asset and a Liability?
Determining whether something is an asset or a liability is not always straightforward. Physical things that initially start off as an asset, can quickly turn into a liability.
When thinking about assets and liabilities, a quick test could be to determine whether the property puts money into your pocket or takes money out of it.
The keyword is cash flow. Depending on the cash flow direction, a property can be an asset or a liability. When the cash flow goes into your pocket, it’s an asset. When it gets out of your pocket, it’s a liability.
A House is really Not an Asset (at least not for you)
Not to discourage you from buying a house or anything, but your home is probably not an asset! Or at least it’s not a financial asset (in case your definition of an asset is something pragmatically useful to you).
A home is still an important asset (in the sense of being valuable and useful to you) as it provides a roof for your family where you live and nurture your children. As a parent, a home is always a useful asset. But in the financial sphere, that’s just not the case.
If you’re paying off a mortgage, your house is an asset, but not for you; it’s an asset for the bank. The bank is the one that is generating money from your transactions.
In other words, money is leaving your pockets and going into the pockets of the bank.
Your house is not really an investment because if you sell it, you make some money, but you still need somewhere to live. If you spend the money you get from your home to pay rent, it’s like replacing one liability with another one.
Robert Kiyosaki famously said a house is not an asset specifically for such reasons. As long as the cash flow comes out of your pocket instead of getting into it, it’s a liability. House maintenance and associated bills are the main reason that makes owning a home a liability.
Your Home Is actually an Asset
However, if you change your perspective and focus on other qualities of having a home, you could consider it an asset.
You can always sell your house to get big cash when you decide to. If you invest that money well, it could be a good asset that will allow you to own another home, perhaps a better one. From a financial perspective it does make more sense to invest the money rather than pay off a mortgage.
You can also borrow money against your house. Again, depending on how good of an investor you are, that money can become an asset that will allow you to cover your liabilities and even acquire more assets.
Since real estate typically increases in value, you can generally sell your house for an impressive profit, especially if you bought the house a long time ago (30+ years). Real estate appreciates over time, which is why it’s a good investment. However, that’s not the case when market crashes happen. That which was an asset two months ago can become a liability now.
Generally speaking, your house shouldn’t be the only asset you rely on. As the famous proverb goes, you should never put all your eggs in the same basket. If you’re a profit-oriented person, considering your only home an asset isn’t the wisest thing to do.
However, if you’re a landlord, even if it’s just one apartment other than the home where you live, that property is an asset. As long as it pays more than it spends, the property you own is an asset, and that’s all you should keep in mind.
So, what do you think of your house? Is it an asset or is it a liability? As long as you’re living in it with your family a comfortable life, your house is definitely an asset. However, if you’re thinking about the matter in a profit-oriented mindset, your home is not an asset. As long as it costs money to maintain your home, it’s technically a liability, just like your car.
Check out our other posts related to this subject for more information. Leave us a comment down below if you have an opinion you want to voice. I’m happy to personally answer your comments and questions.