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Why your House is your Biggest Liability

Sure, we've always been told the wonders of home ownership, many of which are true. But generally, most people tell us our homes will be our biggest investment and become our largest asset. I disagree. For the average American, your house will be your biggest liability.

Asset vs. Liability

Let's start with the basics. When you think of the words asset and liability, what comes to mind? In simplest terms, an asset earns you money, a liability costs you money. Assets are things which generate cash flow for you, while liabilities generate expenses, or negative cash flow. This seems simple (and it is), but many people try to complicate it. Just always remember assets put cash in your pocket, liabilities take cash away.

But everybody has a friend that got rich in real estate, right? Many smart investors make a lot of money in real estate. Lots of real estate can become assets and generate positive cash flow. Don't get this confused with your house though. Cash generating properties require tenants. This way somebody else is covering the expenses associated with the building, and the building becomes a pass-through for cash. In this instance, real estate is an asset and could make the owner a lot of money. However, with a house, all the expenses are on your shoulders.

The Asset Fallacy

You'll often hear that houses are assets because property values generally appreciate over time. So what? What does that do for you today? Is that putting cash in your pocket? Appreciation doesn't do you any good until you sell the property. Most people will live in a house for several years or a lifetime before selling it, so money is rarely created for the owner.

Perhaps you'll tell me good investors are patient, and we cannot expect to make money over night. There is a lot of truth in this statement. Being patient often pays off in other cases, but the longer you own a house, the more money you'll spend on it.

Liabilities Created by Your House

You may still say the appreciate over time will out-weigh the purchase price of your house, and this makes it an asset. But look at all the expense you'll have:

Even if you are able to save up for a house and pay cash in order to avoid interest payment, look at all the other expenses that add up very quickly. For now, let's assume everybody reading has financed their house. If you bought a house 15 years ago for $100,000, you may be able to sell it today for $200,000. However, look what it has cost you.

If you financed the whole amount with a 6% APR loan for 30 years, you will have spent $78,968 on interest and $28,951 on the principal of your loan for a total of $107,919. Plus, you still owe $71,049 to pay off the bank. Look at the total when you add all your other monthly expenses:

15yr-Housing-Expenses

Considering these estimated expenses (they would likely be higher), even if somebody was to offer you double your purchase price of $100,000, you still would have lost more than $50,000 over the period you lived there! Plus you'll have to pay the realtor! If you consider the time value of money and inflation, you're losing even more money because $200,000 today isn't as much as $200,000 fifteen years ago.

So is Home Ownership a Bad Thing?

No, it's not. There are many more things to consider, everything from tax benefits to the alternatives (rent). Once you own your house (mortgage paid off), your expenses will go down drastically, and you'll never have to worry about paying rent to somebody else. Also, shelter is a necessity. You will either have to rent or purchase. When done right, with the appropriate mortgage, and in a good location, purchasing is the right decision. Just don't fool yourself that your house is an asset.