Your house is NOT an asset
Chances are you’ve heard someone at some point utter the phrase “your house is your biggest asset”. Seems legit, after all home ownership is the American Dream. But the reality is, your house is a liability, perhaps your biggest, depending on other financial factors. When you purchase a house to live in you begin to incur inevitable expenses.
What are assets and liabilities
Before we can understand why your house is a liability, we must first learn what both assets and liabilities are. In simple terms(because simple is always better), an asset is something you buy that generates income. Things like rental properties, businesses, royalties, or affiliate The latter, liabilities are the opposite, things like cars, clothing, electronics, boats and generally anything that cost money to maintain and/or generates expenses. These terms, and the ability to identify such are fundamental on your journey to financial freedom.
Why your house is a liability
Now that we know these terms let’s think about home ownership in all its American glory. You find the house of your dreams. You make an offer, get financing, and everything runs smoothly. Let’s look at the expenses that you are now responsible for. There the mortgage, insurance, taxes, lawn care, and repairs. All of these expenses are taking chunks of your income. In the unfortunate event you lose your job, these things will likely become unsustainable, and the home may likely end up in foreclosure.
How a house can become an asset
On the other end of the spectrum, real estate used as an asset, is one of the best ways to generate passive income . Let’s take the same example from above, however, instead of living in this house, we make it a rental property. There will still be expenses involved such as the mortgage and insurance, but by renting this out for an amount greater than the expenses, a profit margin is created. Now the rent – mortgage, insurance, and taxes = profit. That same house, that was once a liability, is now generating income rather than extracting it. Not only are you now generating a passive income, but you are also paying off the home over time. You can always convert your house to an asset from a liability by moving out and turning it into a rental, the way I did when I accidentally started building passive income. The most important thing to remember is that you always want to own more assets then liabilitie