Is your house an asset or a liability? In this post, I’ll explain three different ways we can buy and use real estate and how each one may affect your finances.
There has been big confusion and heated debates on whether a house is a good investment or not? Is a house an asset or a liability?
Why do people say yes buy a house because it’s better than renting and other people say no don’t buy a house because the house is a liability?
Today let’s talk about when a house is an asset and when is a liability and how we can turn the liability into an income-generating asset
Is it a good idea to buy a house? Why are some people saying it’s a good idea and others say it’s not?
Now, this question is not very easy to answer without context because there are many different ways to buy and use real estate but for this post, we are going to talk about three different ways we can buy and use real estate and how each one may affect your finances.
1. Buy a house to live in
The first way and this is what most people do is buy a house to live in.
The majority of people who buy houses buy them for themselves.
A big argument for buying your own property is that you will be building equity on your own property instead of paying someone else rent, and that can be true but before deciding to buy a house we must take into account many other factors.
For example, in many cases when you buy a house you will need to put around 20% of the total value of the house as a down payment.
This means that if you’re buying a $250,000 house you will need to have at least $50,000 saved in order to buy your house.
Also, you have to take into account that you are now fully responsible for any maintenance and repairs your house needs.
You will also have to pay property taxes and insurance on your property. These are additional expenses that you normally do not have when you rent.
As you rent the landlord is responsible for repairs, maintenance, property taxes, and ensuring the property.
Note: Renting is not a waste of money, you should read this post where I explain why, in my opinion, renting isn’t a waste of money.
So depending on your current situation, your savings account, and your income buying a property to live in might or might not be a good idea for you.
Another factor that is important to point out is that buying a house for yourself is an emotional decision.
You want to buy the house of your dreams, and that is totally okay, but in many cases that comes with a big price tag for a long period of time and many people are not financially ready for that commitment.
Chances are if you buy your dream house your monthly living expenses will go up significantly. since a dream house is an emotional decision it is easy to buy something that is out of your budget.
Also, buying a house means that you will have a Financial commitment to this property over the next 15 to 30 years meaning if this property puts you in a tough financial situation, this might not be the right move right now.
This is the basic thesis from Robert Kiyosaki (a businessman and an author) when he says that a house is a liability yes you are building equity on your own property that when or if you eventually sell you might make your money back but it also takes cashflow away for the next 30 Years which can tie you up financially for a very long time.
Now of course if you have a great income and buying a house will not put you in any financial danger and buying your dream house is something that you’ve always wanted to do then more power to you
Just know that a house for you is not an income generating asset.
Another argument for buying a property for yourself is that by the time you sell, if you sell sometime far in the future, your property might have appreciated in value so you can sell for a profit but some Studies have shown that real estate prices have actually not increased in value as much as staying consistent with inflation.
In a way, a house that you buy for yourself is more of a savings account than an investment that is one of the main reasons why Kiyosaki says that a house is a liability because it takes your money away every month which can put you in a tough situation financially.
If we go over Robert Kiyosaki’s definition of an asset and a liability
An asset is something that puts money in your pocket consistently while a liability is something that takes money out on a consistent basis.
With this definition, buying a property for yourself is a liability because it takes money out every month and it doesn’t provide money back unless you sell which can be 30 to 50 years down the line.
In the meantime, your property is taking money out of your pocket every single month.
2. Buy a house as an investment property
That is not the only way to buy real estate, have you ever heard some entrepreneurs say “own what you rent and rent where you live”
This is another method of buying real estate, hear you buy real estate as investment property instead of a house to live in.
The main concept of this method is that you get other people to pay for your properties and increase your net worth for you instead of doing that with your own hard earned money.
So, when you buy your own house you are paying for your own mortgage which creates equity in your house but you are doing this by working and earning money yourself and paying for your own mortgage and creating equity with your own money.
But by buying investment properties like rental real estate your able to have other people who rent from you pay your mortgage and create equity for you.
Think of rental real estate properties as piggy banks when you buy your own property you are buying your own piggy bank and you are putting your own money in it.
When you buy a rental property, for example, you are buying a piggy bank where other people put money in for you which increases your net worth and since you’re not paying for these properties you can focus on saving up to buy another property to get somebody else to put money in.
Plus, many properties also create positive cash flow. Once, your mortgage, taxes, and insurance are paid for and there’s still money left over that is money that you get to keep as a positive cash flow
As long as your properties have a positive cash flow you can virtually get as many as you can because the money to pay for them every month is not coming out of your pocket it’s coming out of somebody else’s.
Your job is to get as many of them as you can.
This way other people are putting money on these properties for you which increases your net worth every single month.
For example, let’s say that you are renting an apartment to live in for $1,200 a month and you have $50,000 in the bank that you have saved up to buy a property.
So you think to yourself, instead of buying a house for myself which will increase my living expenses and put me in a tight financial position I’ll buy a duplex and rent it to other people.
A duplex is basically a property were two different renters can live in.
So you buy and rent your duplex to two different people for $1,200 each, this means that you are now generating an extra $2,400 every month.
Now, after mortgage payments, Insurance, taxes, property management, and maintenance expenses you still take away $350 every month in positive cash flow, which adds an extra $4,200 to your income every single year.
But the best part is that somebody else is paying for your property. let’s say that your mortgage payment is $1,200 per month, this means that you would be adding $14,400 to your net worth every single year paid by somebody else.
And now since your income has actually increased you’ll be able to save up for another investment property.
As you continue to invest over time you can create an arsenal of people adding to your net worth every month and even creating enough cash flow to become financially independent or even buy your dream house now since you have other people paying your rent every month.
Your assets can pay for your dream house instead of paying for it yourself.
3. House Hacking and make your house an asset
Okay, so what if you already bought a house how can you turn this liability into an asset?
This is where the Third Way comes in, this is what many people call house hacking.
With a little bit of creativity, you might be able to turn your house into an income-generating asset.
For example, some people instead of buying a house for themselves they buy a duplex, which again is a property with two homes in it, they live in one home and they rent out the other.
This way they are able to live rent-free. the people renting the other home pay rent which also pays for the mortgage and the owner gets to live in their own property for free.
Many other people rent their spare bedrooms to roommates lowering or eliminating the mortgage payment.
Others rent their homes or spare bedrooms on Airbnb or Booking.com to use their homes to make extra money, again lowering or eliminating mortgage payments altogether or even making positive cash flow from their homes.
Take into account that here you still own the property and you will have to pay for property taxes, maintenance, insurance, and a few other things that you need as you rent out your home.
The conclusion, is your house an asset or a liability?
Now, of course, there is much more that goes into finding and investing in real estate.
This is just to show you a deeper understanding of real estate as assets and liabilities and to understand that real estate is not all black and white and it requires you to learn and analyze what is the right move for you.
if you’re looking to invest in real estate make sure you learn the specific laws from your state or country and analyze each property critically. Laws and regulations vary from state to state and country to country.
So taking the time to learn the game will be highly beneficial if you want to invest in properties.
Thanks for your time
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