Is Your House An Asset Or A Liability?

Where to start with this one – lets start with a few of the folks I’ve seen post on it already – Flexo, LazyMan, Jim, Matthew, Smith Financial Place, MyMoneyBlog, Associated Content, FreeMoneyFinance, Canadian Capitalist, MoneyMonk, Crazy Engineer, Yahoo!, Watson Inc, Project Senso, Google Forum, just to name a few.

Let me precursor this with the fact that I bought my first condo in 2005 for 112k and sold it 1 year later for 175k (Yea, yea, I paid capital gains, but still made 40k in real cash and NEEDED to get out of the small house with the second kid on the way).  Any way you slice that it is an increase in the asset column. 

I too read R. Kiyosaki’s book and was excited at first in digging in to it, but towards the end it found myself curious as to where the meat of the book went. Anyway, yea, he mentions it is a liability, and I agree with him 50% of the way. My belief is that the house itself is an asset, and the mortgage a liability. Could I put that $3200 per month towards something else giving me more return on my investment? Probably. But how do you determine the value?

It’s a real downer when I look up at my Progress Bar in the upper right corner of my page showing I still have a hefty wall to climb to reach the 1MIL mark. I am only at 5.29% today because I have incorporated my home mortgage in on the balance sheet as a liability, because, technically the MORTGAGE is a liability in my opinion. However, how do I compensate for the asset part of it? How do I include the VALUE of the house? Well, here is my new hypothesis to solving the debate:
1. I’m going to log in to all the major players in the “house value” webrings:

2. Then I’m going to take the average of each of them, throwing out the highest and lowest prices to get a better average.
3. Next I’ll take that number and subtract the mortgage payment that I still owe, showing my appreciation.
4. I can then take the total mortgage payments I’ve made that year and assess a value to what I’m getting for my 40k per year I’ve put INTO the house.
5. Rebalance that number into my Net worth statement –

It’ll certainly make the progress bar look a bit healthier.  I’ve been thinking of how I could leverage the MORTGAGE vs. the HOUSE.  They both should be accounted for, but how.  Everyone does it differently and this is going to be my solution to the problem.  Sound like a plan? Feasible? We’ll see!

Filed Under: adviceHouseReal Estate

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  • I always thought that equity in your house was the asset, and the mortgage, unpaid balance is liability. That’s how I calculate our net worth.

  • hank

    Hey Digerati – yea, everyone seems to have their own way to calculate it; but when you think about it, it leverages out on the balance sheet the same way, and I figure if you’re saying your house is only worth what you paid for it, then you’re cutting a few bucks out of your asset column, but yes, on my balance sheet post it shows the same thing you’re talking about. Thanks for the comment – nice blog yourself. 🙂

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  • Jack

    You’re not taking into account on your balance sheet the interest you’ve paid on the mortgage or all the upkeep costs, which is money down the drain. Unless you plan on moving into a smaller house every year or so, selling the house you’ve been living in, and making significant gains, a house is a liability, any way you cut it.

    I’ve never met anyone who makes a consistant profit from selling the homes in which they live. There are moving costs, capital gains, the pain in the ass of moving, etc. Also, if you move into a comparable house in a comparable neighborhood, you’re not going to see any profit because ALL the houses’ prices will have increased. You would have to constantly downgrade to see any real profit.

    In short, people who flip houses for profit don’t live in them. A house is only an asset if you’re renting it out or flipping it.

    I read an interesting article on why renting is better than buying, and I think there’s a lot to be said for it, especially if you can get certain utilities for free. You’re not paying for any upkeep or for property taxes. The simple fact that a case can be made for renting shows that your home is not an assett.

  • Hank – First, Kiyosaki is a financial nut job who is all about selling books and seminars and not, as you aptly put it, putting finance meat on the bone. Forget him.

    A house is indeed a balance sheet asset, with a current value on the asset side (your method is what I use) and the mortgage balance on the liability side. Very simple. If you want to get more accurate, deduct transactional selling costs from the valuation.

    There are two other ways of valuing the house that I can think of. If you are retired and not in an emotional position to ever sell the house you live in, you can determine the value based on a reverse mortgage cash flow calculation. Or, you can place a monthly value on the shelter services that the house provides and then capitalize it.
    .-= Mr. ToughMoneyLove´s last blog ..Does Las Vegas Deserve a Recovery? =-.

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  • Roach L

    Basically it is whether we can afford it or not. If we buy a house that we can’t afford then it becomes a big liability.