Your Home, Asset or Liability

[Scanner]

A house is an asset.

Your mortgage and taxes are liabilities.

Your house is too big of an asset for the average person to not consider it in their financial plan.

[Scanner]

TO ADD:

In our total net worth and being 39.5 years old. . .I would say our equity in our house accounts for 60% of net worth.

(I am dismissing furniture and autos in tallying net worth)

How can you not label that an asset and just dismiss it from all of your financial planning?

Take away our house and you've taken away 60% of my wealth.

[maat55]

Originally Posted by Scanner

TO ADD:

In our total net worth and being 39.5 years old. . .I would say our equity in our house accounts for 60% of net worth.

(I am dismissing furniture and autos in tallying net worth)

How can you not label that an asset and just dismiss it from all of your financial planning?

Take away our house and you've taken away 60% of my wealth.

I'm not sure I consider my home 100% an liability, but at best, I still think it is a feel good investment. Like steve said earlier, it's only an asset if you sell it. To our heirs it is an asset. But to use it as an investment for retirement, would seem like a huge mistake.

This brings up why I started this thread. I think it is wiser to buy much less house than you can afford until you have invested well enough to pay cash for your upgrade. People who buy homes stretching their budgets on a 30 year note, are compromising wealth building and their nest egg. In many cases, over buying on house, is only a step up from rent. When I think of renting, I would do it at a much lower monthly cost than I would the purchase of a home.

I bought my home on a 20 year note and right now between interest, insurance and taxes my home costs 768.00 per month, not a very good investment.

[Scanner]

Like steve said earlier, it's only an asset if you sell it.

So's a stock or mutual fund.

At least with a house, it can never be worth $0.

(unless it burns and you don't insure it)

[disneysteve]

Originally Posted by maat55

Like steve said earlier, it's only an asset if you sell it.

Originally Posted by Scanner

So's a stock or mutual fund.

Scanner, that's true, but the difference in my mind is that if I sell a stock or shares of a mutual fund, I don't have to replace them. I can take the cash and spend it however I choose. If I sell my house, however, I need to replace it to continue to have somewhere to live. Only if I buy a cheaper home would I actually realize any cash from the deal.

[disneysteve]

Originally Posted by Scanner

How can you not label that an asset and just dismiss it from all of your financial planning?

Take away our house and you've taken away 60% of my wealth.

I'm 43 and our home equity is about 35% of our net worth currently (not counting cars, furniture, jewelry, etc. - just financial assets) and that number continues to fall because our investments grow much faster than our home equity grows. By the time I retire, home equity will probably be a little blip on the net worth chart.

Ok, a house is a tangible item that has monetary value, so it is an asset by that definition. However, including it in your financial planning is a whole different issue. How exactly do you count it in your planning, Scanner? I don't see where it would fit. I can't count it as a retirement asset because I can't spend the value of my home to pay my bills when I stop working unless I borrow against it's value, and then it turns from asset to liability.

[Fizgig]

Asset or liability aside, owning this home is excellent for my cash flow.

Total payment - 1100/mo
Rental income - 550
Tax deduction - 300

All in all it costs me $250 a month to live in my beautiful treehouse by the lake, and all the extra cash is stocked away in savings. Rents in my area are around $1000 a month.

The utilities are about $100/mo more than they'd be in an apartment and I do spend about $1000 a year on home improvement and gardening, but still I'm WAY ahead.

I'm very lucky to have the standalone garage apartment. I can easily afford the home without it, but it's just a sweet deal. Even if my home never appreciates and I sell it for what I paid, I'd still pay less in the long run.

[maat55]

Originally Posted by Fizgig

Asset or liability aside, owning this home is excellent for my cash flow.

Total payment - 1100/mo
Rental income - 550
Tax deduction - 300

All in all it costs me $250 a month to live in my beautiful treehouse by the lake, and all the extra cash is stocked away in savings. Rents in my area are around $1000 a month.

The utilities are about $100/mo more than they'd be in an apartment and I do spend about $1000 a year on home improvement and gardening, but still I'm WAY ahead.

I'm very lucky to have the standalone garage apartment. I can easily afford the home without it, but it's just a sweet deal. Even if my home never appreciates and I sell it for what I paid, I'd still pay less in the long run.

Your's is truly a liability-asset. Your offsetting the liabilty, good job.

[Scanner]

If I sell my house, however, I need to replace it to continue to have somewhere to live. Only if I buy a cheaper home would I actually realize any cash from the deal.

Or rent. If I sell my house for $350,000, and since it's my primary residence I escape capital gains tax, and now I rent an apt. for $500/month splitting it with a roommate, I have made $349,500 from the sale of said asset.

On the stock though, I absolutely have capital gains tax (15%, I think).

I must confess, I can't recall if the capital gains tax only is exempt if you buy an asset worth more (remain upwardly mobile).

However, including it in your financial planning is a whole different issue. How exactly do you count it in your planning, Scanner? I don't see where it would fit. I can't count it as a retirement asset because I can't spend the value of my home to pay my bills when I stop working unless I borrow against it's value, and then it turns from asset to liability.

I count it as part of my "net worth" goals.

I can also benefit in retirement from my home in 2 different ways:

1. Reverse mortgage.

or

2. (my preference) Sell it to an investor with an agreement to lease back. The asset is then "pre-liquidated" for probate when I pass away.

I then have $350,000 in the bank earning interest and a bonafide agreement to remain in the home and escape taxes, repairs, etc.

Really, I know the spirt of what you are saying, DisneySteve - you and JimOhio are on such a track that your home will probably be somewhere around 5% of your net worth.

For the average American, who has a small pension and a few thousand stashed away, I don't know how you can just pencil off your home on your net worth statement.

[irmanator]

also i was thinking if you have it paid off before retirement it would be a lower cost of living when you are retired, plus if you have a fixed rate mortgage your rate will stay the same. A renter always has the risk of the rent going up.

[snafu]

There are too many risks for me to consider renting. The owner can choose to condo-ize or sell the property and force me out. The desire for home ownership made me stop silly spending and save a downpayment. Once acquired I was in the savings habit and that permitted me to make 'balloon' payments and pay off the mortgage in 13 years. Meanwhile the property increased 7% annually in value [on average]. At one point when I wanted some extra funds, we rented a basement bedroom to an international student. That was so successful our student's family invited us to stay at their home in their country as their guest. Talk about non-taxable benefits!

A couple of years ago I sold that house for 3 times the sum I expended for purchase price and morgage interest. My only expenses were taxes, maintenance and sweat equity. I could not rent an apartment for that output.

I bought a condo with nearly the same sf for 1/2 the sell price and lucked in to timing as these units are now selling for more than double due to the upward thrust of our economy. I am only taxed on the footprint which is 2/3 less than the house. I love it here because I can take an out-of-country contract and know that condo contractors will look after my property.

[maat55]

Originally Posted by Scanner

Or rent. If I sell my house for $350,000, and since it's my primary residence I escape capital gains tax, and now I rent an apt. for $500/month splitting it with a roommate, I have made $349,500 from the sale of said asset.

On the stock though, I absolutely have capital gains tax (15%, I think).

I must confess, I can't recall if the capital gains tax only is exempt if you buy an asset worth more (remain upwardly mobile).



I count it as part of my "net worth" goals.

I can also benefit in retirement from my home in 2 different ways:

1. Reverse mortgage.

or

2. (my preference) Sell it to an investor with an agreement to lease back. The asset is then "pre-liquidated" for probate when I pass away.

I then have $350,000 in the bank earning interest and a bonafide agreement to remain in the home and escape taxes, repairs, etc.

Really, I know the spirt of what you are saying, DisneySteve - you and JimOhio are on such a track that your home will probably be somewhere around 5% of your net worth.

For the average American, who has a small pension and a few thousand stashed away, I don't know how you can just pencil off your home on your net worth statement.

The whole point is that you need to not consider it part of your net worth or a retirement asset, unless you intend to downsize drastically. It's a place to sleep. A reverse mortgage,hmm, lots of ripoff fees there, I don't like bankers enough to give them the pleasure.

[tomhank17]

i hope this would not be the case with every one. What if a person has a house and rented it, i think in that case it will give some good money.

[maat55]

Originally Posted by tomhank17

i hope this would not be the case with every one. What if a person has a house and rented it, i think in that case it will give some good money.

Then it becomes an investment property. Until you rent it and the renter pays the expenses, it's a liability.

[Merch]

I am going to try to answer this a different way.

If you purchase a car, it is an asset. It has positive value. Someone will buy it from you for money.

Now Rich Dad Poor Dad would label the car as a liability. I would label it as a non-income producing asset. I do understand his argument that you want to focus your wealth on income and revenue producing assets.

Let’s take this one step further. I got a loan on the car instead of paying cash. Does this change what the car is? I would say no and even in the investment community the answer would be no. For the loan is called an ABS or Asset Backed Security. In other words, the car loan is backed by an asset (the car).

I believe this parallels a house. The mortgage is a liability that is securitized by an asset (the house).

Also, if the house wasn’t an asset, do you thing the bank would loan you 6 figures on your good name?

[sweeps]

Right, Merch. Technically everything you own is an asset. Even an asset that you expect to depreciate over time is an asset. Everything you owe is a liability.

The discrepancy is some people are using the informal definition: assets are good things, liabilities are bad things (which isn't necessarily the case).

[disneysteve]

Originally Posted by Merch

If you purchase a car, it is an asset. It has positive value. Someone will buy it from you for money.

I got a loan on the car instead of paying cash. Does this change what the car is?

I believe this parallels a house. The mortgage is a liability that is securitized by an asset (the house).

I agree with one exception. What if you owe more than the car or home is worth? Is it still an asset? It no longer has "positive value" in that case. Lots of people are finding themselves in that situation now with homes bought during the bubble with interest-only loans and no downpayment. And people do it with cars all the time. They trade in a car that isn't paid off yet and roll that balance into a new loan, putting themselves into a situation where they owe a lot more than the new car is worth.

Can you call something an asset if it has a negative value?

[feh]

Originally Posted by disneysteve

I agree with one exception. What if you owe more than the car or home is worth? Is it still an asset? It no longer has "positive value" in that case. Lots of people are finding themselves in that situation now with homes bought during the bubble with interest-only loans and no downpayment. And people do it with cars all the time. They trade in a car that isn't paid off yet and roll that balance into a new loan, putting themselves into a situation where they owe a lot more than the new car is worth.

Can you call something an asset if it has a negative value?

You're combining the asset with the liability associated with it. You need to keep them separate.

The car/house is still an asset. Anything that has value (can be sold) is an asset. The loan that needs to be repaid is a separate entity.

The fact that I may owe more on the car/home than what it's worth does not prevent me from selling the car/home and thus realizing its value.

[disneysteve]

Originally Posted by feh

You're combining the asset with the liability associated with it. You need to keep them separate.

The car/house is still an asset. Anything that has value (can be sold) is an asset. The loan that needs to be repaid is a separate entity.

The fact that I may owe more on the car/home than what it's worth does not prevent me from selling the car/home and thus realizing its value.

True. I guess I'm forgetting my basic accounting. The value of the car would go on one side of the balance sheet. The amount owed on the loan would go on the other side. So yes, the car would still be an asset.

[Merch]

Steve,

Yes, if you owe more on the car or house, the car and house are still assets. The car loan or mortgage are separate entities.

If you own a house for $500k and have a mortgage of $550k. Does that mean your house is worth -$50,000? No, the house has a value separate from the mortgage.

You could still sell your house for $500k. So, in essence, the house and mortgage are 2 separate entities.