Your Own Home: Is It An Investment or Liability?

We very often here this cliche “Our house is our biggest investment“. Unfortunately, that is NOT really correct for most of the people. Why? Because for them, the house and its mortgage are actually the biggest burden and liability. The house could give you pride and joy, and it could give you good shelter and even could give you happiness, but in the investing world, for most of the case it’s still the biggest liability you ever had. Having said that, yes, it could be your “biggest purchase” but whether is it an investment or liability, it’s actually depends on you.

(Whenever I refer to “house”, it actually can be broaden to all kind of real estate property such as: house, unit, apartment, town house, villa, condominium, flat, duplex, etc. So to avoid confusion, I will use term “home” instead to refer to it)

Asset vs Liability

Before we continue further, let us agree on the definition of asset and liability in investing world (The definition will be slightly different if you are talking about accounting). Simply put, asset is everything that can appreciate in value -or- produce income. Everything else is liability. To check whether something is an asset or not, do this 2 step test:

• Can it  give you regular income ? -or-
• Can it appreciates in value over time ?

If you cannot answer “yes” on any of the test above, it’s not an asset. For example: the car you just buy from the car yard. Unless you have a rent-a-car business, courier business or similar that uses car, your car is not asset.

What is Investment? Investment is an act of buy and/or selling asset to produce income and/or capital growth.

Make Money From Your Home

Your Home Is Your Biggest Liability

Your home might be your biggest liability if it meet one criteria: it has been mortgaged i.e: you have to take a home loan to acquire it. Why? Because essentially you took a debt to buy something for your consumption. It’s exactly the same with buying those plasma TV on your credit card. Here are the similarities:

• The goods are only for consumption (to be used only)
• The interest paid for taking this debt is not business cost, i.e: not tax deductible
• You cannot afford it, but you want it now, hence getting a debt to acquire it.
• You don’t use it for making money.

The only different between your home and that TV is that in long term your home can appreciate in value , i.e: you can sell it higher than when you buy it.  But “Long term” here is maybe 10 – 15 years as we don’t usually in the business of buying and selling your own resident. And within those years, the house will still be a burden.

Compare this with investment property where you will get rental income and all the expense is usually tax deductible (depends on the law of your country, though…)

Your Home Might Become Investment Asset

Now you can transform your home to meet the criteria as asset. The question is how to make your home an investment asset that will make you money.  Some of the way to make your own home become productive investment asset:

• Do home-based business from home.
• Rent out that unused extra bedroom for extra money
• Take the equity from the home to acquire other investment asset (i.e: to purchase share or purchase business)
• etc…

By doing those activities, your home is now involve directly with your money making activities and earn your home a status as investment asset.

So…

Your home might be the biggest purchase you ever made. To make the most of it, you need to transform it to become “investment asset”. In other words, since you use a lot of money to acquire it, it will be better if you can use it to make more money. Otherwise it only become your biggest liability ever that will not producing any money for you.

— Denis Kristanda

Related articles: