Your House Is Not an Asset

Is your house putting money in your pocket?

My definition of an asset may differ from your banker or financial planner. I am going to say this from the start. I am not a homeowner. I am not a financial planner. Take what I say as my opinion, and not financial advice.

What is an asset

I am going to make this easy. An asset is something that puts money in your pocket. A liability takes money out of your pocket. With this simple definition of an asset, I am going to show you why I think your home is a liability.

Always a renter

I did not have to pay for my own housing until I was 33 years old. No, I did not live in my Grandmother’s basement. I joined the Army straight out of High School. So, for the next 15 years, the Army picked up my rent. Whether it was cost-free living in the barracks or living in Germany winning the Cold War, the Army picked up the tab. Then I left the Army and had to pay my first rent for a German house.

So you bought a house

The American dream. The new house with a two-car garage where you can not park your car because of all of the junk stored in the garage. The white picket fence and large front lawn which you mow every Saturday. The three bedrooms, one master bedroom for you and your wife, and the other two for the children. In other words, your dream house.

The parameters for the asset

So you bought your $250,000 home. I am going to assume you put 20% down. That is $50,000 that you have tied into your that you can not use for anything else. This asset is already taking money out of your house.

I am also going to assume a 30-year mortgage since you are a young couple and are starting a family. Sure, you are going to pay more interest over the time of the loan, but we want more money in your pocket each month for those unexpected family expenses. Plus we want to cover the expected expenses, like new shoes, class projects, and after-class activities.

Taxes and insurance vary from state to state and country to country, so you need to figure those out. Regardless, they are present in every country because the government needs money to run, and they get that money from your taxes.

The mortgage

A $200,000 mortgage at about three percent will cost you about $1,082 a month, $852 for principal and interest, $142 for taxes, and $88 for insurance. Just for the mortgage alone, you are paying $230 for taxes and insurance.

Your mileage may vary. That is a $1,082 monthly expense for that asset you just bought. Is money going in or out of your pocket?

You tell me that the $1,082 is going towards the equity in your house. No, $852 is going toward principal and interest, and in the beginning years, more goes towards interest.

Only $338 of your first mortgage payment actually goes toward your equity. $744 went towards interest, taxes, and insurance. The bank always gets paid first.

Oh, and you still owe $199,662 on your $200,000 mortgage.

Don’t worry, after one year of payments, $4,122 of your $12,984 went to the principal.

After 10 years, you still owe $152,519 on the mortgage. Is your house still looking like an asset?

After 30 years, you paid the bank $389,520 on a $200,000 mortgage.

Repairs and maintenance

On top of that, since you own your property, you are responsible for all repairs and maintenance required for your new asset.

I rent, so if the heating is not working, I call the landlord. I did mention that I live in Germany, so heating is essential during the cold months. If your heating goes out, you have to do all of the work of finding a heating repairman and paying the bill.

Buying a home is an emotional purchase

I am not against you buying a home. You do need a place to live and raise that wonderful family of yours. I just want you to realize that buying a house for you is different from buying a house as a rental property, which would be an asset.

I work in IT. We have a saying, treat your servers like cattle, not your pets. Pets are emotional, and pet lovers spend enormous amounts of money to take care of their pets. Cattle, on the other hand, are raised for a purpose, putting meat on somebody’s plate. Cattle are business, and pets are a pleasure.

Homeowners also pump lots of money into their homes that do not have a good return on investment. Putting a $50,000 pool in your backyard increases your property value by about $20,000. Business-wise not a good investment.

Emotionally, how many good memories are you going to have because of the backyard pool parties with your friends, neighbors, and family?

That is why pets are so expensive. It’s emotional.

Asset or liability

Before you declare your home as an asset or a liability, take these into consideration.

Is your home putting money in or taking money out of your pocket?

Who is paying for repairs and maintenance to your home?

What about taxes and insurance?

How fast are you really accruing equity?

Could your 20% down on your home be better invested in something that puts money in your pocket?

If you want to buy a home, do so. Do not let me otherwise influence you. The memories you build will be treasured.

You might want to consider something investors say, “Own what you rent and rent where you live.”

Be on the lookout for a future article where I cover some alternatives for that $50,000 down payment for your home.

Originally published at https://pivottowardsfreedom.com.