Many people desire to buy a house because they think of it as a good investment. A house can be a useful tool as you seek to build wealth. However, there is some discussion around whether a house is an asset or not. Of course, there is nothing wrong with buying a house. But is a house an asset or a liability? Let’s explore this for a better understanding.
Asset vs liability
Before we decide if a house is an asset or a liability. Let’s understand the difference between assets and liabilities.
What is an asset?
An asset is something you own. It is anything of value that can be converted into cash. Assets could include things like stocks, Bonds, Mutual Funds, cash in your bank account, and certain physical properties. In most cases, assets will appreciate over time.
What is a liability?
On the other hand, a liability is something that you owe. Liabilities can include things like outstanding loans or legally indebted payments which will continue.
Is your house an asset or liability?
Now that you have a far better understanding of assets and liabilities, is your house an asset? In most of the 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. However, 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 tenure of your home loan. The costs will add up quickly to cut into any profits you gain from a potential sale in the future.
Although your primary residence might not be an asset, that doesn’t mean that property can’t be an asset. In fact, the physical property can be a very lucrative asset.
If you choose 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, you’ll need to find a creative way to cover the cost of your home loan. Rather than 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-story building and rent out the other units. In this case, you may be able to eliminate your housing costs.
But if this is not the case, then your primary residence is not an asset because it is costing you money.
Is buying a house still a good choice?
Now, you need to decide if your house is an asset. However, although your home falls into the liability category, is buying a house still a good choice?
All things considered; buying a house is still a smart financial decision for many. As you build equity in a home, you will continue to stabilize your long-term financial well-being.
Should you buy a house or rent?
In several cases, a house is not an asset. However, that doesn’t answer the question of whether you should buy a house or rent a place. Although you might be tempted to skip buying a house 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 a city for at least a few years, then buying could be the right move. Buying a house will allow you to build equity in a property instead of paying rent.
If you are working to improve your finances but aren’t financially stable yet, then buying a house is probably not the right move. You don’t need to lock yourself into a long-term loan commitment without having your finances on stable ground. Another reason to skip buying a house is if you plan to move shortly. In either case, renting could serve you better.
If you are seriously interested in buying a house soon, don’t buy a house more than a budget you can afford. No matter where your finances stand, you should always avoid being house-poor. Essentially, house poor means that you will technically afford the monthly EMI however cannot afford anything else. Don’t put yourself into this delicate financial position.