Your Home Is Not An Asset

38 comments

The property conundrum 🙂

Back in high school accounting (urgggg), I was told that an asset is something that you own, and a liability is something that you owe. I accepted that as fact after all who was I to question the powers that be.

But that little “fact” neglect one crucial factor – a vital distinction that makes all the difference. An asset is something you own that MUST earn money for you. Merely owning something doesn’t necessarily mean that it’s making you any money and expanding your wealth.

This critical distinction is one of the primary reason that so many people spend their lives filling up their wealth pantry with liabilities (things that cause money to flow out of their lives) believing they are filling their lives with assets and only discover too late that they are effectively broke.

It’s absolutely key that when you create your wealth plan that you understand that something that can bring income into your life is an asset, while something that causes money to flow out of your life is a liability. With this understanding you can start putting things in the correct drawer and know accurately whether the things you are spending your money on are taking you to wealth heaven or money hell.

The most common area where people get this wrong and where they incorrectly sum up their perceived wealth is the house they live in.

Your primary residence, the home you live in, is a liability. Even if it is paid off, if it does not generate any income for you and it costs you every month in council taxes, utilities, insurances and maintenance – it is absolutely not an asset.

One of the most insidious wealth destroyers is people not understanding this and believing that a bigger house is part of their wealth strategy. Unfortunately there is also an underlying societal belief that it’s a sign of success.”

The allure of a bigger, better house

Many people are seduced by the idea that progressing to a more expensive house means they are securing a bigger asset. However, they are actually digging themselves into a bigger financial problem.

The poverty cycle looks something like this.

You keep moving up, from a one bedroom flat to a terrace, to a free-standing bungalow, to a better suburb. Due to complete naivety, your money is flowing into something which you believe is an asset. But actually you are now trapped, because unless you sell that property and downgrade, you have nothing that can bring income into your life and so you have to keep earning.

This is the trap of the aspiring middle class.

While people might get a 20 or 25 year mortgage, the scary reality is that after 20 years of being home owners, most still owe huge amounts on their mortgages because of this pattern of constantly “upgrading”. In most of the western world, people move on average every seven years – upgrading to a new house. Every time they move, they get a new mortgage and they don’t realise that even though they think that because they have a bigger property, they have a better asset, all they are really doing is expanding their liability drawer.

This is because if you’re moving every seven years, you have barely reduced the capital on the mortgage debt. Mostly, you’ve just been paying off interest.

With the introduction of interest only mortgages on principle residences this has become ever scarier. Thousands of people opted for interest only mortgages but failed to make adequate provisions to ensure they could pay these off with real assets that earn money for them.

This is what happens when people don’t understand the fundamental difference between an asset and a liability. Certain people will end up at the end of the 15 year interest-only period being forced to sell the property, possibly in a down market. They will be left with no home, no assets and all they have done is paid exceptionally expensive rent for 15 years, while also being responsible for all costs on the house like maintenance and taxes. And, naively, they thought they were buying an asset.

Don’t get me wrong – I love owning my own home. Just don’t be misled into believing your home is a wealth creating asset.

Having the security of a roof over your head that nobody can take away is also a vital part of your financial well-being. And I encourage people to buy and pay off their homes.

But don’t believe that it is something that goes into your asset pot as part of your wealth strategy. Don’t keep upgrading to a bigger and bigger house if you’re not at the same time putting money towards proper assets that can bring income into your life and feed you when you no longer feel like working for money. If you believe your home is an asset you could end up with is a nice fancy home, but starving.

Investment property

Investment property is something entirely different. This is indeed an asset that can bring in income.

Property is such a great investment because it’s the easiest asset class in which to use leverage. In other words you use debt in a way that expands your wealth, rather than destroying it.

Leveraging and using debt to accelerate your wealth is not something that should be entered into lightly. You have to research what you are buying and what the investment return will be.

The key with investment property is to understand that everything is in the numbers. Put aside all your beliefs and emotions and just look at whether it makes financial sense.

Many owners of investment property don’t understand the importance of running this asset like a business and this is because many become “property investors” by accident. For instance they start renting out the apartment they couldn’t sell when they got married or they inherited great aunty Mabel’s house when she died but they never really understood the numbers. You have to realise that just owning a property doesn’t make you a good property investor.

And the most important part of being a good property investor is understanding the risk and reward balance of taking on debt.

Leverage (using good debt to accelerate your wealth) is like fire. It can absolutely destroy and burn you, but at the same time it can warm and protect you. Investment property is the easiest and most powerful way to use it to do that.

I’d love to hear your thoughts on this article, did this surprise you to discover your home is not an asset? Please share in the comment below.

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38 Comments

  • Dominic Useneno Paul says:

    i need more info on property investment

  • Dominic Useneno Paul says:

    I am not surprise to know that my home is not an asset. But I will like you to tell me more about PROPERTY INVESTMENT

  • Baba Ashake says:

    Thanks for the enlightenment and Education

  • John Kujems says:

    I think and believe Its not a liability if its occupied by tenants who pay there dues because all you would have done over a period of time is an investment of sure appreciation which can be traded in future.

  • Fidel says:

    Good and awesome

  • Nnamso Effiom John says:

    The write up is educating. I’m a M.sc Accounting Student @ University of Uyo Nigeria.

  • Jennifer Ebere Richards says:

    I really think lot’s of Nigerians need to read this.

  • Bola Martins says:

    Good and educative piece. However, what about in a situation where you use your home as collateral to obtain fund from the Bank , and the money is used for business to generate decent income and later repay the loan ti the bank. Won’t you classify your home as an asset in that instance?

  • Moses says:

    Thanks for the knowledge and the enlightenment.

  • Suleiman Adeyemi says:

    Good moves!

  • Enoch Sam says:

    Please what if I build a house then leased it out. won’t I be upgrading it with my money,income from the building for the people to leave in. isn’t it a liability also?

  • Ayeboafo says:

    Assets indeed must create wealth. We most of the time think living in big mansions describes how wealthy people are. I don’t believe that. I believe in building those mansions and leasing them out generate another project could create a wealth

    *Wealth creation is a lifestyle*

  • Salis says:

    Do not think your house is an asset unless you build or bought it to be resold leased.otherwise consider it as a liability because you have to keep maintaining for it to remain a home

  • Folorunso Olatunji Adigun says:

    Your home can be an asset, based on how you manage it. You can draw money out of your monthly income to pay yourself rent like you’re not a home owner. Such money can be put to other uses or you can possibly save it in a special saving account. Such savings can then be re-invested in other investment.The point is, If you own a home you should live in it like you rented it. If you’re not working again or earning other income you can then rent out part of the home and continue to use the proceeds to take care of yourself.

    • Etido says:

      That’s a fake life. Why should you assume you’re paying rent when in its real sense you aren’t?

      • Folorunso Olatunji Adigun says:

        If you don’t own a home you will still have to pay rent to somebody okay. Buying a home has saved you the agony of paying somebody else rent, but you will still have to pay yourself, because you invested your money. It’s not a fake life, it’s called financial discipline. If you own the home, paid off and your real cash was invested in it, so you living in it will carry some cost, such as cost of renovation, other repairs, maintenance, tax, depreciation etc. All these makes it looked like the house is a liability. So, to get out of that mind trap, you set aside monthly payment in form of rent in a special savings account from your regular income at the normal rent value of the area where your home is and continue to pay yourself the rent. From the rent savings you can draw all you need to run the home and pay for renovation, repair, tax, insurance, depreciation etc. and the remaining can be re-invested in other venture. If you’re not earning other income you can then rent out part of the home and use the proceeds to take care of yourself. I did this and it work for me. A home sometime gives false image of wealth if one is not disciplined. You have to know the house is depreciating and is replaceable, so when you move in you have to start setting aside that fund, then your home can be a real asset. The difference here is that you’re your own TENANT. Please kindly think deep about this. Thanks.

  • Nkechi says:

    Thanks for this write up.Truely an eye opener

  • Nicholas says:

    Thanks aunty Ann…
    ‘m so flabbergasted….

  • Melissa says:

    Hi Anne,

    Thank you for this post! I’ve learnt so much from it.

    I wa

    ThanksHi Anne,

    Thank you for this post! I’ve learnt so much from it.

    Have a question I hope you will be able to answer or help me out with!
    My question relates to owning property:
    At present I own a property which I rent out. I bought this a couple of years ago but did not look after money around it to start with. The rental income did not cover all the costs at all.
    I not think breaking even according to the numbers. BUT I am not sure how/what to look at
    – should I be including possible TAX rebates in this?
    – how and where can I learn about making sure I have these numbers correct?
    – should I continue with this propety not that its breaking even.. or start over correctly?

    The above property does have a small amount of equity in it.

    I want to know how to work out if I use this equity to purchase either a new rental property or something to live in (i rent currently).
    What the new numbers will look like.

    Thanks
    Melissa

  • Juliette says:

    Firstly Ann – thank you so much for all your passion, wisdom and generosity in sharing your knowledge! And what a fantastic article! I have bought your book and am loving it! I have a question about property and your article: I have been fortunate enough to have had sensible wealth chefs as parents who know the value of compounding and having no debt. As such I have been taught good habits as a child and so find myself without any debt and have started saving and investing . I have only just started working last year so am at the beginning of my wealth journey. My question relates to owning property – at present I am renting but would like to own my own home – however as you have mentioned this is a liability. If I get a mortgage this will flip my balance sheet and net worth from good to bad (it looks good at the moment since I have no liabilities). So how do I go about owning my own home without throwing the balance out? Do I buy something well below what the banks have approved me for and pay it off as quickly as possible? And while I am paying it off is there anyway that I can get into an investmet property too? Or do I wait until I have paid off my home (liability)? Thank you for your time.

    • Ann Wilson says:

      Hallo Juliette – it is my absolute pleasure and thank you so much for owning your own financial empowerment and the difference you will make in the world with your money working and you and supporting you as you live a rich, juicy life. So regarding property – a personal residential mortgage sits in what I call neutral debt territory – it isn’t bad debt as in consumer debt which destroys wealth and it also isn’t good debt. i.e debt that can buy you assets which expand in value and earn you income. On your balance sheet you will include the value of your home in the asset drawer and also the mortgage in your liability drawer and so they will effectively cancel each other out in your wealth generating net worth calculation. Owning your own home is great and brings loads of other wealthy aspects to your life. Wanting your own home is absolutely fine but don’t stretch yourself so far in getting the max mortgage you can and thereby prevent yourself from building assets. As you have suggested, rather get a property for less than the bank will lend and rather use the other borrowing capacity to get an investment property too so you are growing your wealth pot. On my own journey to financial freedom, I bought properties which I could do up and lived in them while I renovated them and then either sold them or held onto them as investment properties depending on which made the most financial sense. Not all properties are good rentals.

  • Zodwa says:

    Thank you Ann on these wonderful insights. I am CA by profession and I am aware of this but never had the will to implement these. But slowly getting there

    I just wanted to find out if you would recommend cashing in my retirement savings to settle my mortgage, provided the scheme allows it and use the monthly amount i pay now to build up my savings again.

    I would save on tons of interest of course but what would be the pitfalls, i.e hidden risks. I am 38 years old.

    • Nqabenhle says:

      Hi Zodwa. I am keen to hear what Ann would say. I would not advise that. My belief is that where focus goes energy flows. Instead of focusing on your debt, I would suggest you focus on building your assets. Take that money and buy assets instead And build your asset portfolio. The debt will take care of itself.

  • Gary says:

    I have just taken steps on letting out my 3 bed semi. Met with a friend who manages properties and he gave me some great advice. I have a lodger at the moment who is on a 6 month agreement so the plan is to let out the whole property from August. Seems like common sense to have someone else pay my mortgage while also generating an income. My mate will manage it for a small fee which I don’t mind paying as he already manages 42 properties. Having him do all the spadework releases me to concentrate on building my business. I really should have done this earlier……..

  • Faith says:

    I am guilt ridden. I own two properties, one is my primary residence and the other is my where I run my guest house business. My parents left me a sizeable inherittance and I put almost all the money into improving my business and nothing to reduce the mortgage bond on my primary residence. In hindsight, I should have split the money. Nonetheless, I am paying extra into my residentaial bond and I hope to pay it off within 5 years. Oh, how I wish I could have put some of the money into my residential bond. I can’t seem to forgive myself! Ann, please help, anything I can do to ease the pain?

  • susan laing says:

    Interesting and useful information.

  • Emma says:

    Thank you so much Ann. I am learning so much from you. I am worried that we do have an interest only mortgage with 25 years left on it and can’t change to repayment because it will double the cost. I am just going through your program and looking forward to growing and flowing some money, clearing debt then eventually learning how to sort out that mortgage issue!! I am 38 and wish I knew all this years ago. I will raise my three girls with your money skills. Thank you for sharing and caring xxxx

  • Nontuthuko Mgabhi says:

    Thank you Ann for embedding my understanding. I understood this literacy at age of 22, I bought my first residential apartment at age of 23 (which is a 3 Bedroom, 2 Bathroom). I made sure that the propert I live in is below my means since this is a liability not an investment. Thereafter I started investing in property wisely. I am now 28 years of age and I own 3 properties (excluding the one I live in as this one is a liability therefore cannot be counted as an investment). I am now looking into expanding my property portfolio and invest in Self-Storage Units.

    • Nqabenhle says:

      hi Nontuthuku,

      Well done and how I wish I got this info at that age as well. If you want to accelerate your property investment even faster, please let me know. I started 5 years ago and I have 40 properties now. I help other people move even faster. I can help if you are keen. Nqabenhle Manana. Contact me at nmanana@growthpoint.co.za

  • Phumi says:

    😎 23 and learning the right principles.

    Thank you, Anne.

    • Ann says:

      Way to go Phumi – ooooh you’ve got loads of that wonderful wealth spice called time to really work for you so get out there with these principles and live a big, rich, juicy life with your money working hard for you.

  • Willesden 09 says:

    This is so true and the sooner the whole UK realises it the better. Everyone should have a house to live in. The current property boom is no good to any home owner, unless you sell up and leave the country.
    On an investment property it is a different story and even here I would advocate a much slower growth but at the same time a lot more new builds for long term rental purpose. With a long term strategy like that your assets will increase over a long term.

    • Ann says:

      Absolutely – My big concern in the UK is the number of people who have interest only mortgages on their home and haven’t put in place any mechanism to pay that off.

  • Boitumelo Molefhe Ndebele says:

    A very big thank you. I wish I knew this information earlier….

  • Ingrid says:

    Friends of ours and my husband and I were having this conversation just this week. We have just bought a house and both Hubby and I have have 1 investment flat each. When I asked if I should take a part of the mortgage for the new house, I was told, half or nothing. I refused as my investment flat is generating an additional income for me. I am going to buy a second one in the new year too. It may be my biggest debt at the moment, but it’s worth it.

    • Ann says:

      Well done Ingrid for understanding the clear distinction between good and bad debt. The good debt is debt which you are consciously using to expand your wealth pot and giving great leadership to your money.

  • Patricia says:

    Good Morning Ann,

    Thank you very much for all your inspiring messages of wealth creation, i am 54 years of age , a bookkeeper, but your information is so basic and understood.. These are such true and wise words. I print all your articles, and try to distribute them to my friends. I even paste the articles in the classroom at the high school that my daughter is teaching, for the students to reminisce on. with these articles it can be understood by any student from grade 8 – 12.

    I trust that God will continue to bless you to be a blessing to others.

    Regards
    Patricia

    • Ann says:

      Thank you Patricia for sharing this wealth and helping others to master this incredible thing called money which we just aren’t taught about.
      With much love
      Ann

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