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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11 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.

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