Your Home is a Liability and an Asset…. Say What?

Robert Kiyosaki experienced some criticism for describing one’s home as a liability.  He classifies your home as a liability because it “takes money out of your pocket”.  Based on this description he is absolutely correct.  Your home is likely your largest individual monthly expense.  At the same time, you need a place to live…. So, you have two options rent or buy….  Rent takes money out of your pocket with zero chance of return, a pure liability.  However, the benefit of renting may be to lower your monthly expenses and free up additional capital for investments. This strategy has been used successfully by many real estate investors.

On the other hand, you can buy and consider your mortgage as paying rent to yourself….  Dave Ramsey states “your house is an asset-the mortgage is the liability”.   He continues “A house makes you more money than it costs you, so it’s an asset.  You should pay off the mortgage as fast as you possibly can, but you cannot ignore retirement savings while you’re doing that.”  I would add that you should pay off your mortgage as fast as you can while saving money for retirement and investments…. For some that may mean a 30-year loan while for others a 15-year loan.  There are many articles that argue for either option and in the end, it is a personal decision.

To decide which option is best, you must first review your finances and decide how much you can afford for a home while allowing for continued investment.  Do not buy a home based on your pre-qualification amount.  If you already own a home and do not have available cash for investments then you have three options. 

1.  Work more/earn more.

2.  Tap into your home equity if available via refinancing or a HELOC

3.  Downsize your House/mortgage.

In summary, your home is a liability because it takes money out of pocket every month via the mortgage, taxes, maintenance and utilities… while simultaneously acting as an asset because it is your HOME and it appreciates in value over time (equity).  The rent you pay yourself (mortgage) is not lost but can be viewed as a form of forced savings that can be accessed in the future. 

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