Today’s article is all about whether your home is an asset or a liability. We are going to go over what an asset is and what a liability is. And then we’re going to talk about the number one thing to know when your home is actually an asset or a liability. And then we are going to figure out whether you should or should not include your home in your financial freedom number.
And then we’ll talk about how to make your home an income-producing asset, and the costs of home ownership. And then I am going to share my thoughts on home ownership.
What is an Asset?
Let’s define this so that we can figure out if our home is an asset or liability. Essentially the dictionary definition of an asset is a useful or valuable thing, a person or quality. So in that regard, yes, your home would be an asset. There’s also another definition, which is something you own. So that would be considered an asset as well. And then the last definition is something that puts money in your pocket and your home may or may not fall under this definition of assets.
What is Liability
Now let’s talk about what a liability is. The dictionary definition of liability is the state of being responsible for something, especially by law. So if you are buying a home and then you take out a mortgage, you are responsible for paying that mortgage. Another definition is something you owe.
So if you’ve not paid off your home yet, then your asset could be considered a liability because you would owe a certain amount on your home. So if you are paying that mortgage, then money would be going out of your pocket.
Is Your Home An Asset Or Liability
The number one thing, to determine when your home is an asset or a liability is to choose your definition of an asset because that’s what’s going to help you determine whether or not it is an asset because it does qualify for some of the definitions of an asset. And it also depends on how you are using your home, which we are going to talk about. And when you are deciding which definition you want to use for an asset, you can look at what you are calculating.
For example, if you are calculating your net worth, then I would include the value of your home in your net worth because it is something that you purchased and you have that value of your home. And in talking about determining your net worth, if you’re not sure how to do that, I do have an article for you about that. You can check that one by CLICKING HERE.
But if you are calculating your financial freedom number, for example, the amount that you are figuring out in order to retire or become financially free, I would not include the value of your home Because it is not something that is producing cash flow for you, unless you’re using it in a certain way.
And the reason I would not include the value of your home when calculating your financial freedom number is because it’s not producing money for you unless you are house hacking or doing a few different things, which we are going to talk about in a moment.
But if you own the home yourself and you are living in it with your family or just by yourself, and it’s not generating any income for you, then do not include it in your financial freedom number. A lot of people get confused about this because they think, oh, well it is an asset. It is a value. But when you are calculating your financial freedom number, you want to look at the income that is coming in.
So if your home is not providing any income, you can’t include that when you are calculating your financial freedom number, the amount that you need to retire. Simply owning a home and not receiving any income from that home that is not going to help you retire because we are looking for assets that are giving you income so that you can retire and live off of that income.
For example, if you have investments in the stock market, which you can cash out because you aren’t living in your stock market investments, you can cash those out and live off of that money while in retirement.
How to make your home an income-producing asset
So let’s talk about actually, how to make your home an income-producing asset, where you collect income by owning your home. One thing you can do is have another person live in your home. That is what I do. I have roommates and they pay me rental income. So I’m receiving income by owning my home each month because I’m renting out rooms on my property.
Another way you could do this is if you have a basement or even just a mother-in-law basement apartment, you could rent that out to a family or a couple and collect income that way. So it would be kind of more separate than renting out rooms that are right next to your room. Or you could even do a short-term rental by using Airbnb.
For example, if you want to perhaps put a room on Airbnb just for a month to create a little bit of extra cash flow, you could do that. Or if you are going out of town for a long time, or taking a long vacation, you could even rent out your house for a month or two, depending on how long you’re going to be gone.
Another option could be to rent out empty space in your house as storage. So instead of someone renting a storage unit, they could rent out a room or even part of your garage and pay you to store their items. Or if you have extra parking in your driveway, then you could rent out the parking area to someone that may have a boat or a trailer that they don’t use a lot, but they don’t have a place to store it.
Or you could even rent out a room for office space for someone else. Or if you have your own business, you could use a room for your own office, and it wouldn’t really provide income, but it would give you a reduction in taxes. And also if you have a beautiful large backyard, you could rent out that space for weddings or gatherings and make some income that way.
So there are a number of different ways that you could make some income from your home and make it an income-producing asset.
Costs associated with home ownership
Next, let’s talk about some costs that are associated with home ownership, because a lot of times people just think it is so much better to own a home, but there are a lot of things you need to pay for when you do own a home. For example, there are maintenance costs. You need to keep your air conditioner up to date and your furnace.
You have different appliances like your fridge or washer and dryer. So you need to make sure that those things are running properly and do maintenance on those. And then even when those items go out, you’ll need to replace those items. I had to replace an air conditioner in one of my properties recently, and it was actually on top of the condo.
So it was hard to find someone to replace that air conditioner. And it costs a lot more than replacing an air conditioner in a normal home where they wouldn’t have to go on the roof. So think about those kinds of costs when you were deciding to purchase your home, there’s also yard work to be done if you have a yard with your place.
And I know for me, one of my places, there were big Cottonwood trees in the backyard, four of them, and three of them were completely dead. One of them was pretty much half dead. So I had to pay to remove those trees. And that was thousands of dollars. So I wasn’t really planning on that. I had no idea how much it would cost to remove trees.
So there are just little things like that that you need to be aware of when you own a home, you need to make sure that you are taking care of the landscaping, so trees do not fall on your house or the neighbor’s house. And the other thing is utilities. And usually, when you are renting, you’re probably just paying for gas and electric and your own internet.
But when you own a home, there’s also a sewer charge. There is a storm drain charge. There’s even a streetlight charge. You have to pay for garbage and recycling depending on where you live, but they’re not just two utilities. So keep that in mind. There are a number of utilities you’ll have to pay for.
And then if you buy a place in an HOA with a homeowner’s association, there’s that extra monthly fee that you will be charged in order for the HOA to take care of some of the things around your property. And there are also taxes, which never go away. Even after you pay off your mortgage, you will always be paying taxes on your property.
And then don’t forget about insurance. You want to make sure your property is insured in case something does happen to it, that you just have to pay your deductible. And then the insurance will take care of the rest. And then of course, if you take out a loan, a mortgage loan in order to purchase your home, you’re going to have that monthly mortgage payment to pay.
So just keep in mind there are a number of different costs associated with owning a home. Comment below and tell me if you would say your home is an asset or a liability.
My thoughts on home ownership
And then I want to share my thoughts on home ownership. One of the things I really like about owning my own home is the security. I don’t have to worry about someone selling the property and then me having to move. I know for sure that it is mine and I can stay there as long as I want to. And I think when you have a family it’s even nicer to have that security where it’s just me.
It’s not so bad if I did have to move, but moving a whole family and taking the kids out of school, things like that would be a lot harder. So I like having that peace of mind, that security, knowing that I own the place and I don’t have to move unless I want to move. And another item I like about home ownership is that you can do what you want with your home.
You can paint the walls, in different colors if you want to, and you can redo the flooring. And if you don’t have an HOA, then you can even paint your front door or do things on the outside of the home to make it look different. But you have full control on what you want to do with your home. No one else is saying, no, you can’t paint the bedrooms or upgrade anything.
And then another benefit is you don’t have that hassle of having to move. If the landlord does sell their property, then you’re going to have to pack up all of your things and move. And that is a lot of work. I did that recently just last year. And it was a lot of work to move all of my items because I had a house I had fully furnished before. So moving all of those items over plus finding a new place to live can also be difficult.
So if you own your own place, you don’t have to worry about moving. If you’ve held your property for the long term, it is appreciated in value, it’s gone up over the years. So if you have your mortgage paid off, if you own your home outright, you can leave that to your heirs and someone could move into the property and divvy it up amongst all of your children.
And then another option of owning your own home is that if you get tired of your home, you can actually rent it out and move into another place. And you could even rent if you wanted to, or if you wanted to purchase another property, that could be an option, but you could rent out your home and then collect cash flow every single month from that property.
So it’s up to you, whether or not you want to purchase a home. And whether you define that as an asset or a liability, but I wanted to share these thoughts with you so that you can kind of see, in what ways a home could be an asset, or it could be a liability.
Disclaimer: The views presented in this article are only for informative and educational reasons. The article is not meant to give expert advice or suggestions for a specific security or product.