Could Your Largest Asset Not Really Be an Asset?

by Will Lipovsky · 4 comments

new homes
The American dream is a goal we’ve all heard of at some point in our lives. This dream involves raising a family, building a successful career, and (most importantly some would have us believe) owning a home. Everybody dreams about owning a home and it’s marketed as your biggest asset in life.

But is owning a home really your biggest asset in life? You start paying the mortgage and equity begins to build, but you have to remember that the typical mortgage spans 30 years. Who really stays in their homes long enough to reach that 30-year mark to have their house become a full asset nowadays? With house maintenance, and the fluctuating value of the housing market coupled with how long someone stays in their home, a house can actually be a liability on the balance sheet and an expense on the income statement.

Think about it. The upkeep on a house is a constant. A good rule of thumb is to estimate maintenance at roughly 1% of the value of a home each year. Until the house is paid off, you have a mortgage that is debt, along with sunken costs of maintaining a functioning home such as water heater replacement or kitchen appliance replacement. That’s money down the drain just to maintain your homes value or increase it minimally.

Plus, gone are the days when everybody just buys a home they live in forever. A buyer of a single-family home tends to stay in that particular home for about 13 years in this day and age. Of course you’re building equity in your home in the meantime, but by the time interest is paid on the loan, the equity being put into the home is hindered. Plus, you have to pay a substantial commission fee to a realtor to market and sell the house when you want to move.

Lastly, the natural fluctuation of the housing market may affect the value of your home. 2008 is the most recent, and most extreme example of how the mortgage market can become over inflated. Owning a home doesn’t guarantee that you will never be upside down on the home, and there is always real risk in owning a home such as natural disasters wiping everything out. If the subdivision you reside in begins to experience a decrease in property values, the investment in your home begins to lose value through no fault of your own.

It’s Not All Bad Though

Yes, a house can very much be a debt. Still, many people own a home and end up making it work in their favor.

For one, and perhaps most importantly, the mortgage acts as forced savings for people who own a home. They may not get a great return on the asset, but most people are diligent about paying their monthly mortgage bill, and thus continue to build that equity through the years of ownership.

Secondly, real estate has been an appreciating asset long term around the developed world. Hold the asset long enough, don’t keep using the equity like an ATM machine by serially making cash out refinances, and everybody will have positive equity eventually.

The idea of telling someone their house is more of a liability instead of an asset is thought provoking. There will always be push back and reasons why that statement is invalid, but it is a conversation that needs to be had because assumptions can often lead to ruin. Too many people rush into home ownership without weighing all the pros and cons in search of the American dream. Maintaining a home, fighting potentially lowering property values, and moving costs are all reasons a house is in fact a debt and not an investment.

Owning a home can be a great decision, but it doesn’t work for everybody. Don’t automatically assume you are doing yourself a favor by stretching yourself financially to squeeze into that dream home. It could be the disaster you couldn’t afford.

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  • Ryan G says:

    I think that this is an important question, and the answer is very dependent on location as well as the personal situation of the home owner. A house is an investment, but it isn’t necessarily a good investment. I bought a home in 2009, and sold it in 2016. I made $120,000 thanks to my particular area becoming extremely popular. I did have to spend money when I sold the home to make it turn-key, move in ready (and therefore command a high price). I also had to spend money maintaining the home over the 7 years I owned it (HVAC work to the tune of about $4K, plus a $2K water heater replacement, plus $5K of landscaping work). I haven’t sat down and done the math to determine my true cost of ownership (after property taxes, interest, maintenance, upgrades, etc. minus income tax benefits) to determine if I would have come out ahead simply investing my down payment and renting.

    I think that a potential home buyer needs to research the area they plan to buy in to determine if it is cheaper to rent or to buy. There are rules of thumb out there for the home price to rent cost ratio. You must take some care in estimating the cost to rent as you need to compare “apples to apples” between buying a house vs renting. Basically you need to look at the cost to rent on a sq ft basis for similar properties (homes) vs the cost to buy a given property (a home) to make the comparison fair. Comparing the cost to buy a 3 bedroom house vs rent a 1 bedroom apartment is not a fair comparison. There are some areas of the country where rental properties are in extremely high demand, so the cost to rent is insane relative to the cost to buy. In other areas, the reverse is true. Property values are high, but there isn’t much rental demand, so rental values are low and it is better to be a renter.

    Buying a home is also a good hedge against rent inflation. Rents in my area have significantly increased over the last 10 years as the popularity of the area has grown. Increases of 50% over 10 years are possible. If you are a renter and are priced out of an area due to rent increases, there is little you can do besides move. As a home owner, your mortgage cost is fixed (as long as you don’t go with an ARM). Granted your property taxes and insurance will surely go up over time. Will they outpace the rate of rent inflation?

    In the end, buying a house was a good decision for me. Once my expat assignment is over, I’m going to buy another house. I want the stability of a fixed cost of housing and knowing that as long as my job doesn’t change, I won’t have to move. My family and I can put down “roots”. We can modify our home to our hearts content. There are both tangible and intangible benefits.

    I think that people should avoid the assumption that their home is their primary vehicle of savings in life. You need a place to live, and that costs money. Buying a home or condo is one way to have a place to live and build some equity. But we shouldn’t fool ourselves into thinking that our home is a great vehicle for long term savings. A home is a good investment that you can also live inside of, but it is a decidedly non-liquid asset that costs money over the long run, so from a pure returns perspective, there are better ways to invest your money.

    • David @ says:

      Congratulations on making quite a bit of dough on your investment. And did you figure out whether you would be ahead if you simply invested the down payment? Either way though, count your good fortunes because the returns offered in the last 10 years isn’t really normal so don’t put too much of your future on the line because of what happened to your decisions in recent years. 🙂

      • Ryan G says:

        I never did the math on investing the cash vs buying the house and I’m at the point where I’m not too interested in doing the calculation. It is time to move on… I also recognize that I was extremely fortunate to time the market (completely by accident) to buy and sell when I did. I hope to do OK on my next home, but I don’t figure I’ll ever do as well as I did on my last home.

        • David @ says:

          You never know. You might do even better! Be happy about this transaction and may your next purchase be a good one too.

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