Your Primary Residence is a Home, Not an Asset

HomeWhile there isn’t necessarily a great debate raging, there are strong opinions on both sides of the question, “is a home an asset or a liability?”

There are those that believe the home they live in should be considered an asset. However, there is a school of thought, popularized by Robert Kiyosaki (author of Rich Dad Poor Dad), that says a home, particularly one carrying a mortgage, is a liability.

Before we go any further, let’s look at Merriam-Webster’s definition of these two key words:

as·set [ˈa-ˌset also -sət] noun

  • A valuable person or thing
  • Something that is owned by a person, company, etc.

li·a·bil·i·ty [ˌlī-ə-ˈbi-lə-tē] noun

  • The state of being legally responsible for something
  • The state of being liable for something
  • Something (such as the payment of money) for which a person or business is legally responsible

Why Your House is an Investment, and an Asset, too [Monvator]

Looking at those two definitions, a case could be made for both. There is no doubt that many have sold their home at a great profit, supporting the idea that a house can be a valuable thing, an asset. On the other hand, when your home is carrying a mortgage, you are liable for the home and you are legally responsible for making payments. That would clearly make it a liability.

Something to consider. In the July 15 edition of Bottom Line Personal, a previous SavvyRecommendation, Diane Pearson (CFP, CDFA), notes, “Don’t be fooled by the recent real estate recovery – homes simply are not good investments. From 1890 through 2012, on average, home prices gained absolutely nothing in value after adjusting for inflation. Owning a home actually costs money – lots of it.”

I have adopted the belief that a home, a primary residence on which a mortgage is owed, is a liability and should not be viewed as an investment. I previously touched on this topic, at least tangentially, in a couple of other blog posts, The Value of my Retirement Portfolio and How Do You Stack Up.

5 Reasons Why I Don’t Know My Net Worth [Common Sense Millennial]

I noted that when considering preparation for retirement – the focus of this blog – I like to look strictly at portfolio value (aka financial wealth) – which excludes things like home and car values – which are traditionally included in net worth, which is determined by subtracting the total dollar amount of all liabilities from the total value of all assets.

Home as a LiabilityMy rationale? When you are ready to retire, who cares how much Kelly Blue Book believes your car is worth or how much Zillow believes your house is worth? Those numbers are largely irrelevant.

While having a significant net worth may sound impressive, it isn’t particularly helpful if the majority of that number is based on what you – or Zillow – believe your house is worth. In the 2007 time frame, prior to home prices crashing, there were a lot of people with inflated beliefs regarding their net worth, which was largely based on perceived home values.

There are lots of people out there that profit from selling the idea that a home is a valuable asset and you should do everything in your power to own one. That is not always the case and you shouldn’t.

Even if you do everything right (e.g. buy the right sized house, buy at a good price, get a fixed rate loan, etc.), you will be better served by viewing your home as a liability and not give it consideration when calculating your net worth (or at least understand the difference between net worth and financial wealth) and conducting retirement planning.

If you are interested in investing in real estate, consider purchasing a rental property or Real Estate Investment Trusts (REITs). With respect to retirement, and specifically generating retirement income, it is much more useful to focus on passive and portfolio income, not your home.

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21 comments on “Your Primary Residence is a Home, Not an Asset
  1. SavvyJames says:

    A Google+ reader starts off the conversation by stating…

    “I totally agree with you James. A person’s primary residence is certainly a liability. Many people don’t think about property taxes, maintenance, repairs, time lost to household chores (like mowing) and the added risk of owning a home.”

  2. SavvyJames says:

    A Twitter reader states…

    “I completely Agree.”

  3. SavvyJames says:

    A Google+ reader notes…

    “We love our home and are very happy with its location and layout. However, we found this out the hard way. After buying a home well within our means and paying approx 35% down, we started our 15 year mortgage payments. We decided to pay extra on the principal as well so we could finish our mortgage in 8 years.

    We would need to see a 15% rise in our property value to break even on our investment. There is no way that is going to happen even if we keep our home for 15 years.

    Its definitely not an asset.” 

  4. SavvyJames says:

    A Google+ reader notes…

    For some, there may be a possibility to make a decent return. I dont think it prudent.

    “For most of the average families here in the US, it would be better to invest in a conservative plan on their own. Maybe (in the right circumstances) even starting a small business that can bring about residual income in ones retirement age.

    Better the enemy you know than the one you do not….”

  5. SavvyJames says:

    A Google+ reader notes…

    “The investment part of my home to me is knowing that in 5 more years It will be paid for and I’ll be debt free. I bought my house to live in and plan to do that for many more years.”

  6. debt debs says:

    You’ve convinced me! Sound arguments, and I’m not even a Robert K fan. Like your new header, James.

    • SavvyJames says:

      One convert. Great! While there is absolutely nothing wrong with buying a house – as long as it is done wisely – and anticipating that it will appreciate in value over time, it makes no sense to include it in a retirement plan. Accordingly, getting away from focusing on net worth and thinking more in terms of financial wealth behooves would be retirees.

      Glad you like the new look. I wanted to go with something that was a little cleaner and more polished.

  7. I agree with the concept of just living in your home. If it goes up it is a bonus. If it goes down, you don’t care because it is your home. A roof over your head. Buy no more than you need and get the mortgage paid off asap. Having a paid off home is security you can’t put a value on. I keep track of it as an asset, but with insurance, maintenance and property taxes, there are continuing liabilities that keep a hefty monthly payment in place.

    • SavvyJames says:

      “Buy no more than you need and get the mortgage paid off asap. Having a paid off home is security you can’t put a value on” Couldn’t agree more. I look forward to the day our home is paid off. Thanks for adding to the conversation, Wade.

  8. DivHut says:

    The title of this blog post really got my attention. I couldn’t agree more. I don’ know what happened in the last 10+ years with the real estate market and peoples attitudes towards homes but it has really changed. In the “old” days you bought a home to live in, you liked the area, felt safe, was close to work, good schools, etc. Now everyone who buys a home gets asked, what interest rate did you get on the loan, can you flip the home, borrow against it, etc. The shows like flipping Vegas, Boston, property wars, etc. just perpetuate the notion that houses are for buying, appreciating then selling. My parents paid around 18% on their home loan back in the 70s. Let’s see what happens to the housing market if that occurs today. But people still bought properties back then. A home is a place to live. Treat it that way. You’ll have greater peace of mind.

    • SavvyJames says:

      Thanks for stopping by, DivHut and adding to the conversation.

      “Now everyone who buys a home gets asked, what interest rate did you get on the loan, can you flip the home, borrow against it, etc. The shows like flipping Vegas, Boston, property wars, etc. just perpetuate the notion that houses are for buying, appreciating then selling.” Great point. In the past, too many people approach home buying with the attitude that home prices always go up. Working with that mindset, many people assumed that their home would be the foundation of their retirement, with the idea they would sell for a significant gain and move into a smaller retirement home.

  9. Lance @ HWI says:

    Having watched more than a dozen neighbors lose their house in the last 6 years because they treated it like an investment, I can totally agree with you. Investments go up and down so why would you want that for your home and family. Real estate is a great investment, but your home is for your family and life. If you want your life to be unstable like investments can be then good luck. In the long run investments turn out to be great, same with spending time with your family, but your house shouldn’t be that.

    • SavvyJames says:

      Thanks for stopping by, Lance. All well stated. Particularly with retirement planning, the focus of this blog, it seems to me that it is in people’s best interest to treat their primary residence as the place they lay their head at night, and not as the cornerstone of their retirement. For that, focus on building a well diversified stock (mutual funds) portfolio and seeking out multiple sources of passive income.

      While I am hopeful that I can sell my current primary residence for a nice profit one day and perhaps downsize, I do not waste time trying to assign a potential value to it now with the hope that it will pay off in 10 – 12 years. It is absolutely not part of my retirement planning. The same is even true of my rental property. While I have a little (believed) equity in it and I plan to sell it one day, I don’t factor any potential profits from it into my current retirement planning.

  10. May says:

    Glad you published this and you have made some very good points. I disagree but looks like I am in the minority.
    My home is one part of my multifactor retirement plan. Will I be sorry – time will tell.
    People also borrow to buy investments (using margin to buy stocks for example or taking a mortgage to buy a rental property) and that creates a liability but there is still value in the underlying asset and it is still considered an investment – so not sure I agree with that logic.
    There are arguments to bad for both sides. Again, glad you posted and hope it generates some good discussion. Cheers.

    • SavvyJames says:

      I don’t believe it is necessarily a question of being right or wrong. Perhaps it is more a case of different perspectives. As long as a mortgage is owed on a home, it is hard for me to count it as an asset. Perhaps a “potential asset” is more accurate. Two of the problems with equating a home with stocks is that first, stocks (using the term broadly to encompass ETFs and mutual funds) are liquid, whereas a home certainly isn’t. While both a home and stocks can go up or down in value, an individual cannot move quickly in or out of a home. Second, once a home is sold, even if at a profit, another residence must be leased or purchased.

      With respect to retirement planning, I’m not even sure how I would go about assigning a future value (12 years in my case) to my present home. I know that my goal says I need to have $2,000,000 in my (and wife’s) retirement accounts when I retire. I could plan on only having $1,500,000 in my retirement accounts and plan on (hope to sell) selling my home for a $500,000 profit, getting me to the same $2,000,000. The problem is what if do not make a profit of $500,000 when I sell the home? What if I only realize a gain of $125,000? Nothing to sneeze at, however, my annual retirement income from my portfolio is now going to be $15,000 less (using the 4% rule) than planned — 2,000,000 x .04 = 80,000 vice 1,625,000 x .04 = 65,000. Also, as noted before, I still need to go out and either buy another home, even if smaller, it is still an expense I don’t want in retirement; or even if I rent, that is still an expense I don’t desire in retirement. I don’t plan on having any rent/mortgage expenses in retirement. With my approach, it is almost irrelevant what my house sells for (if I decide to sell in the future) because my retirement income will not be based on the results of a sell.

      Net worth is a viable measurement for some. I just believe that for retirement planning, financial wealth is a better gauge. I could tack on $200,000 (both our vehicles are paid off and we have equity in our home and rental property) to my financial wealth and call it net worth. However, the addition of that figure doesn’t help in my retirement planning. At the end of the day, I believe most people will be better served by just living in their primary residence, work to pay off their mortgage before going into retirement and for retirement planning purposes, focus on building their sources of portfolio and passive income. Anything a primary residence, or rental property, sells for is gravy.

      A great, great conversation and thanks for stopping by, May.

  11. SavvyJames says:

    A Google+ reader notes …

    “I completely agree. At the most, I consider my home a last ditch asset in my last year, should I need extra money for a nursing home. And even that is doubtful. My home is…my home! Nothing more or less.” 

  12. Robin says:

    Your home really doesn’t do much for you in retirement other than offer you a place to live (which IS important for obvious reasons) but it won’t help you retire since all the the money you’ve invested into it is tied up until you sell the house. It’s not making you any passive income if you’re living in it! With that being said though, we are homeowners and absolutely on track for paying off our mortgage in the next two years.

    • SavvyJames says:

      Great points, Robin. Well stated. The wife and I are also homeowners (a primary residence and rental) and plan to be mortgage free on both prior to entering retirement. Thanks for stopping by and adding to an important conversation.

  13. Hmmmm … so how about when our home is paid off?! Then we could consider it an asset?! The fact that there will still be plenty to spend money on … such as property taxes, insurance, maintenance, etc. … it may still be a liability. Either way, I can’t wait to have a mortgage free home!

    • SavvyJames says:

      “… so how about when our home is paid off? Then we could consider it an asset?” I would. While there will always be some ongoing fees (e.g. insurance, maintenance, etc.), that is to be expected whether you are renting or buying. Just as you pay some fees to own stocks and mutual funds, you would be in a similar position with your home once the mortgage is paid and you have some recurring fees. The key is as long as there is a mortgage, it is a liability. Like you, I can’t wait to be free of my mortgage!

      Thanks for stopping by and joining the conversation.

  14. Agreed, James!! Too many people sink WAY too much money into their homes for the sake of “resale value”. If it has a mortgage, it is a liability. Even a mortgage free home can be taken away by the govt if one cannot or refuses to pay the property taxes.

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