Your Home, Asset or Liability

[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]

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]

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]

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]

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]

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.

[QueenOphelia]

Definite asset.

-I purchased my co-op 10 years ago and I have around 300k in equity. (talk about timing the market)

- My monthy Maintainence has gone up around 40%....much of it real estate tax/worker's salaries/oil costs skyrocketing. My mortgage is almost exactly half as much as my monthly Maintainence cost.

- The co-op is comprised of 7 pre- 1940 constructed buildings surrounded by English gardens. It's quite lovely and in a very desireable area of NYC (a block to the subway...25 minutes into Midtown)

-The co-op is extremely well-managed both financially and asethetically. We have lots of professional designers, engineers, accountants on the co-op board and they have done a marvelous job increasing the value of the property


So, yes, my home is an definite asset.

[maat55]

Definite asset.

-I purchased my co-op 10 years ago and I have around 300k in equity. (talk about timing the market)

- My monthy Maintainence has gone up around 40%....much of it real estate tax/worker's salaries/oil costs skyrocketing. My mortgage is almost exactly half as much as my monthly Maintainence cost.

- The co-op is comprised of 7 pre- 1940 constructed buildings surrounded by English gardens. It's quite lovely and in a very desireable area of NYC (a block to the subway...25 minutes into Midtown)

-The co-op is extremely well-managed both financially and asethetically. We have lots of professional designers, engineers, accountants on the co-op board and they have done a marvelous job increasing the value of the property


So, yes, my home is an definite asset.

Until you can say it has given you more money than you have given it, it's a liability. Even if you sell it, you have to deduct all the money you have in it to get the profit. Homes with large appreciation in a short period of time are few.

[Seeker]

Until you can say it has given you more money than you have given it, it's a liability. Even if you sell it, you have to deduct all the money you have in it to get the profit. Homes with large appreciation in a short period of time are few.

Interesting view. Valid I suppose.

But if you deem the monies spent in this fashion as a liability, shouldn't you also deduct the monies spent given to your landlord/landlady as well?

You gotta pay someone. Whether you pay yourself for ultimate ownership or you pay someone else for use <renting>... the money still will be spent somewhere. Someone gains.

But renting, IMO, is a true liability.

[Seeker]

Interesting view. Valid I suppose.

But if you deem the monies spent in this fashion as a liability, shouldn't you also deduct the monies spent given to your landlord/landlady as well?

You gotta pay someone. Whether you pay yourself for ultimate ownership or you pay someone else for use <renting>... the money still will be spent somewhere. Someone gains.

But renting, IMO, is a true liability.

A bit more here.

I bought a condo in 1991. 17 years ago. Prior to that, I was paying just under 1k for rent for a similar sized place without a garage. Now, I assure you that I could not find anyplace to rent for under $1k in this area.

But just multiply it out....

17 years X 12 months/year X 1000 rent would be $204,000 over this period of time. And again it's understated because I could not rent any similar sized place in this area anymore.

Over the years I will have paid less than that 204k total for the mortgage, taxes, etc. The original purchase price of the condo was less than that rental total as well.... considerably less.

Ultimately if we stay in our current location we will finish the mortgage in one year. I don't have to do anything in order to consider our home an asset... it already is even if we never sell it.

[maat55]

Interesting view. Valid I suppose.

But if you deem the monies spent in this fashion as a liability, shouldn't you also deduct the monies spent given to your landlord/landlady as well?

You gotta pay someone. Whether you pay yourself for ultimate ownership or you pay someone else for use <renting>... the money still will be spent somewhere. Someone gains.

But renting, IMO, is a true liability.

I agree that your home is a better investment than renting, but it's not as good an investment as people think. Too many people have too much of their income tied up in their homes. Some homes have seen large appreiciation, but most have not, but we keep putting large sums of money into them instead of true investments.