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Your House Is Not An Asset

Updated: Oct 21, 2022

Okay, so is your house an asset? I mean, this is a question that I get all the time. And you know, most people have been brainwashed to think that their house is an asset, right? But is it really an asset? So let me just go with the basic definition of what an asset is. And we’ll talk about what an asset is, from a cash flow perspective. An asset is something that is something you own; it’s got some equity in it. And then generally against an asset, there’s something called a liability. Liabilities, usually debts, are something that you do not own.

But when it comes to the cash flow definition of what an asset is, I believe that an asset is supposed to bring you in cash flow. And so, owning a piece of land, while the definition of a piece of land is an asset, it doesn’t bring you in any cash flow, unless maybe you rent it out. For example, football games or something like that for parking. But it generally just sits there until it appreciates, because it has capital appreciation, then you sell it and make some money on it.

Okay, so it is an asset, because you can do that. And houses are the same thing. But most people are brainwashed to believe that their house is an asset. What if you bought a house in 2006 and you paid $500,000 for the home and in 2009, you wanted to sell that house. You probably may or may not be able to get 250,000 for the home, about half. So, was it an asset? I mean, it’s a depreciating asset in that case. But what if you owed 80% of that? What if you spent 500,000 on it, but you owed 400,000. And now it’s worth 250,000. Now, it’s a liability, right? Now you have to pay back that $400,000 loan, plus, you’re going to lose money in the whole deal. So, it’s not always an asset, right?

And I know that we think it is because we know so many stories, but stories are not statistics. We know so many stories of either our own or people that we know, they bought that house for $200,000 and turned around a couple years later and sold it for $500,000. Or watch all these flipping shows, right? And then we see these “Tarek and his ex-wife, they go out to LA and they buy all these houses, they flip them and they make $50- $100,000 on a house. And that’s fine. But there were a lot of flippers in 2007-2008 that got hammered. They lost everything because they were leveraged, they had all this, what they call the assets, and then the assets got taken away from them because they couldn’t sell them for what they owed on them and what they had in them.

So, I want you to think about your house. It’s not an asset, right? Certainly, if you were to look at the real definition. Let’s say you go out and buy a half million-dollar house, and then you have $400,000 as a loan at 80% loan to value. You’re paying your mortgage, your taxes, your insurance, your maintenance, you’re doing all that stuff, being a good little homeowner. So, you got $100,000 in equity in your house, right? You got 20% equity, and that could certainly go up for sure. But it also could go down. And houses are not liquid. All of a sudden, the market rates go up. And they’re talking about raising rates right now. It’s certainly curtailing the amount of money supply that they’re adding, I don’t think they’ll ever stop, but they’re talking about it. It’s just that talk has spooked some of the mortgage markets. So, people are refinancing less, and they’re not putting their houses on the market. So, the value of houses may be coming down a bit. You got to watch that your house also doesn’t bring in cash flow.

From a cash flow definition, your house is certainly not an asset. By the way, your house is held as an asset on your bank’s balance sheet. If you look at the bank balance sheet, they say $400,000 your house, you look at your balance sheet, it says minus $400,000. It’s a liability, it’s on the liability side of the equation.

So, it’s not really an asset. I mean, just by definition, it’s the bank’s asset. But the weird thing is that when you need a new roof, you have to pay for the bank’s asset. You have to put the roof on, or when you need a new air conditioner, new heater, you have to pay for it, the bank doesn’t come in and say, “hey, I’m going to do this”. But really, the bank effectively owns it until you pay off that loan.

And so, if you don’t have a perfectly good real estate market at the time you want to sell, you might lose money on the house. Certainly, you have to figure in deferred maintenance on that house. So, there’s assets, there’s liabilities, and then there’s a place to live. That being said, you have to look at a house as a place to live. 

Look, maybe my mortgage is $3,000 a month. And that includes all the payments; taxes, your insurance, and then your mortgage interest and your principal, but it doesn’t include your maintenance. So, you’ve got to figure your maintenance at maybe 10% a month. That over time, you’re going to need to accrue so you know you might have 10 years left on your roof, or you might not, but in 10 years, you’re going to have to spend $30,000 on a roof. You better save that money to do that. And that’s a liability. That’s an amount of money that’s deferred that you don’t think about. “you’re like, I spent $3,000 a month”, but you’re forgetting that you probably should be accruing another $300 a month for liabilities. Now, that’s just a guideline. But maybe you need new windows on your house, maybe you need a new roof, a new kitchen remodel. And every time you do some of those things, in theory, you add value. But how much value are you adding compared to what you were spending? You have to decide that things go out of style, and you’re basically fixing up the bank’s assets. At the same time, you’re having inflation eroding away at your purchasing power. So, while you think your asset is going up, it’s actually basically just keeping up with inflation.

At some places in the country, obviously, it’s more, or it’s less, but it’s keeping up with inflation. If you just think that you’re living in this house, and then you’re building an asset, you’re not, you are spending money for a place to live.

So now you have a number that you can take and say, well, I can either own my asset for $3,000 a month plus maintenance, so let’s call it $3300. Or you can say, if I go rent a place, all of that is included, all the taxes, all the maintenance, all the insurance, that’s all paid by the landowner, and you are the renter. So now you have a budget of $3,300. And that other money that you have can be used. That $100,000 that you have as equity can be used for something else. Maybe you put that in the stock market and you really make some cash flow. Or maybe you put it in a in a real piece of real estate that actually pays you rent. So, I want you to just take your brain and say, look, your house isn’t an asset, agree with me on that. And just try and come from that perspective. If it isn’t an asset, what is it? Well, I believe it’s a place to live. And no matter how you look at it, we all need a place to live. And that’s going to cost something. If you think it’s an asset, you’re going to make all this money back and you’ll be able to do a reverse mortgage when you’re 65.

You might not plan on that because things change. To those people in 2007 and 2008, maybe you were one of them, saw things change. And today things are changing at a rapid rate. We’re pumping money into the economy. We’re inflating things. Of course, there’s some appreciation in parts of the country. But there’s also some depreciation. Deflation in other parts of the country, prices of houses are going down in certain parts of the country where people are leaving because of draconian lockdowns or because of high taxes, and they’re going to other places that don’t have those. So, the prices of those places are going up. And the places from where they’re leaving, are going down.

So, I want you to just have an open mind when it comes to assets and liabilities. I like things that are cash flowing to be my assets.  So, I’m getting out. And I’ve gotten out of things that are not cash flowing, because that’s just money sitting there. That’s working against me, because every year your dollar buys about 20% less than it did last year. Inflation is going along, not at 6.8% like the government tells you, I don’t know what metric they’re using. But you know, when my eggs have gone up by 30%, and my meat has gone up by 40% and my gas has gone up by 50%. That’s nowhere near 7%. I go out to a restaurant, I used to pay $8 for a drink. Now the drink is $20 bucks. So that’s a huge amount of inflation in a lot of things that I spend money on and everybody’s got their own inflation rate. The government uses their own rate, but even at 7%, which is what the government says, and interest rates at 1% or 2%. That’s still a negative real interest rate. Real estate can keep up with inflation in a lot of respects, but sometimes it doesn’t. So don’t always think your house is an asset. Look at it as a place to live. And maybe that’ll help you reframe your brain when it comes to knowing what assets liabilities and cash flow are.

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