Why Your House Is Not An Asset

Not surprisingly, Mario feels offended when I suggest his house is not an asset. If he didn’t know me better, he would have told me exactly what he thought, expletives and all!

But he trusts there must be a method behind my madness so he stays with me.

Welcome to lesson one of the End of Financial Year Master Class series – ‘Why Your House is Not an Asset’.

Mario and Maria have approximately $150,000 in cash. They would like to buy an investment property while interest rates are low however they also have a mortgage on their house of about $250,000.

What should they do?

To kick things off, I take them back to our Moowsletter two weeks ago – ‘The Difference Between Investments and Acquisitions’. The basic thesis of that post was, assets put money in your pocket while acquisitions and liabilities take it out.

In other words…

Assets feed you, liabilities eat you.

“So Mario, does your house put money in your pocket or take it out?” I ask.

“It takes it out”. He answers.

“Therefore, using the above definition, is your house an asset or a liability?”

“It’s a liability”.

Mario is shocked. He never looked at his house that way before.

I know how he and Maria feel. Intellectually I have asked them to write with their non-dominant hand. It feels awkward.

Feeling uncomfortable with this new paradigm shift, Mario decides to challenge the point further.

“Why then do the banks regard our house as an asset?”

“Because your mortgage puts money in their pocket. In other words, your liability is their asset”.

Mario understands but soon this paradigm shift about his house morphs into disappointment.

“So are you saying we are not as wealthy as we thought?”

“Not at all. I just want you to understand that wealth creation and retirement planning is all about cashflow. Capital gain might make you feel good but it doesn’t pay the bills”.

For the first time in the meeting Mario nods in agreement. He looks at Maria to make sure she understands too.

“So what do we do with the $150,000 in cash?” He asks.

“Get rid of your non-deductible debt. I.e. your mortgage, credit cards, personal loans, etc. These are your most expensive debts because you are paying them off in after-tax dollars”.

“Ok. So does that mean we can’t buy an investment property if we use the $150,000 to pay down the mortgage?” He asks.

“Not at all. In fact, you can do both”.

A sense of relief finally washes over both their faces. We agree to meet again next week when I will teach them about debt recycling and how to make it tax effective.

So that completes lesson one for this week. When building wealth, get rid of your non-deductible debt first.

Assets feed you, liabilities eat you.

Have a great week!

P.s. In case you are wondering what the EOFY Master Class series is all about, I mentioned it in last weeks Moowsletter, The Clock and Compass Theory. I suggested it might be an idea to cover some key topics which run central to all financial plans, in the lead up to the end of financial year.