A home can be a useful tool as you seek to build wealth. However, there is some debate around whether or not a house is an asset. Of course, there is absolutely nothing wrong with the milestone of homeownership. But is a house an asset or a liability? Let’s explore the issue to gain a better understanding.
What is an asset vs liability?
Before we can decide if a house is an asset, it’s critical to understand the difference between assets and liabilities. Here’s what you need to know.
What is an asset?
According to Investor.gov, an asset is “any tangible or intangible item that has value in an exchange.” Essentially, an asset needs to give a boost to your bottom line instead of creating additional expenses.
What is a liability?
On the other hand, a liability is something that you owe. Instead of providing a boost to your income or net worth, a liability is an expense that you have to manage. With that, liabilities can include things like outstanding loans or legally obligated payments that will continue into the future.
Is your house an asset or liability?
Now that you have a better understanding of assets and liabilities, is your house an asset? In most cases, the answer is no.
Unfortunately, your primary residence is not really an asset. That’s because you are living there and will be unable to realize any appreciation gains.
The answer may change if you have a plan to sell your house within a set period of time. But when a property is your primary residence, the expenses of maintenance create a liability instead of an asset.
In addition to the regular expenses associated with your home, it is important to consider the compounding interest over the life of your mortgage. The costs will add up quickly to cut into any profits you gain from a potential sale in the future.
Can a property be an asset?
Although your primary residence may not be an asset, that doesn’t mean that property can’t be an asset. In fact, physical property can be a very lucrative asset.
If you decide to pursue real estate investing, then you’ll quickly determine that properties can make wonderful assets. Depending on the strategy you choose, you may be able to capitalize on appreciation or positive cash flow to enjoy the benefits of these assets.
In rare cases, you can turn your primary residence into an asset through a strategy called house hacking.
With house hacking, you’ll need to find a creative way to cover the cost of your mortgage. Instead of simply making payments with your traditional income, you can turn your home into an asset by renting out extra space.
For example, you could buy a multi-unit property and rent out the other units. Or clean up the spare bedroom for a cozy Airbnb space. In either case, you may be able to completely eliminate your housing costs.
But if you aren’t house hacking, then your primary residence is not quite an asset because it is costing you money. Keep in mind that you can turn your house into an asset through house hacking.
Is homeownership still a good choice?
You know have the information you need to decide if your house is an asset. But even if your home falls into the liability category, is homeownership still a good choice?
All things considered, homeownership is still a smart financial decision for most. As you build equity in a home, you will continue to stabilize your long-term financial well-being.
Additionally, your home is a great way to transition generational wealth. If you want to use your home as a tool to transfer generational wealth, then you’ll also need to have an estate plan in place. Otherwise, the equity you accumulate in your home may not be efficiently passed down to your loved ones.
Should you buy a house or rent?
In many cases, a house is not an asset. However, that doesn’t answer the question of whether you should rent a place or buy a home. Although you might be tempted to skip homeownership if the house isn’t an asset, that is not always the right move.
Of course, the right choice will depend on your situation. Let’s explore a few scenarios.
If you have stable finances and plan to live in an area for at least a few years, then buying a home could be the right move. Homeownership will give you the opportunity to build equity in a property instead of paying rent.
Plus, you could pursue the possibilities presented by house hacking to fast-track your financial success.
If you are working to improve your finances but aren’t quite stable yet, then pursuing homeownership is probably not the right move. You don’t want to lock yourself into a long-term mortgage commitment without having your finances on stable ground.
Another reason to skip buying a house is if you plan to move in the near future. In either case, renting could serve you better.
If you are seriously interested in pursuing homeownership in the near future, don’t buy more house than your budget can afford. No matter where your finances stand, you should always avoid being house-poor.
Essentially, house poor means that you can technically afford the monthly mortgage payment but almost nothing else. Don’t put yourself into this tenuous financial position.
The bottom line
A property can absolutely be an asset. But your primary residence is likely not an asset unless you’ve chosen to tackle an income-producing strategy like house hacking to turn the tables on this traditional liability.
However, the fact that a primary residence house isn’t an asset shouldn’t prevent you from enjoying homeownership. You need a place to live and you should take pride in your accomplishment of homeownership, even if it is not an asset.