Is My Home An Asset or Liability
Published May 2013
Written by Shawn Yap CFP
A home is one of the basic needs of a human being among air, water, food & clothing. The fundamental purpose of a home is to provide shelter. It is to protect us from the harsh elements of the weather like the scorch of the sun, the drench of the rain, the chill of the wind and also the dangers of the night. Over the last years, the home has upgraded from a basic shelter to pure indulgence. Some homes can have a jacuzzi in the bathroom, a swimming pool in the backyard, hotel style design & even an elevator. The home has evolved so much often blurring the line between need and want.
Well-known investor, Robert Kiyosaki, defines an asset as something that puts money into his pocket while a liability takes money out of his pocket. A personal car or a yacht is a liability as it rarely appreciates and requires expenses to maintain it. Whether your home is an asset or a liability depends very much on your context. In your personal networth, the 2 major types of assets are Growth assets and Lifestyle assets. Growth assets are intended for the sole purpose of creating more in the future. A growth asset is expected to either appreciate or produce an income. These can include stocks, bonds, commodities, unit trusts, real estate, businesses, etc. On the other hand, lifestyle assets are for usage where they may appreciate or depreciate in value usually with some maintenance costs. Common lifestyle assets include your car, home, yacht, exotic timepiece, branded accessories, high-end audio system, jewellery, collectibles like art or antique, timeshare, etc.
Home as a Liability
By default, your first home is generally considered a lifestyle asset. Even if your home is fully paid, you still need to pay for utilities, maintenance, taxes, etc. The value of your home can appreciate to ten or even a hundred million dollars. Still, it is a roof over your head. Unless you are migrating to another country with cheaper housing, your home is primarily a cost centre.
Some first-time home buyers tend to buy the highest valued home possible in order to unlock value and extract capital in the future when they downgrade (from prime area to suburban) or downsize (from larger to smaller size). However, the home is likely to be financed with interest and the gain depends very much on the property cycle at the time of purchase. Therefore, it is prudent to be mindful on the breakeven cost and any potential capital appreciation.
The root of the 2008 financial crisis began from homes where homeowners upgraded their houses with cheap loans and borrow cash from their home equity. They ended up losing their homes as they cannot pay back.
That is why it is not wise to list your home as an investible asset, much less as a source of funds.
Budgeting for your home can also have a significant impact on your personal wealth. If you were to earn $5 million dollars in your productive years, deciding to purchase a $500,000 home or a $1,000,000 home could affect other goals like children’s education, parents’ allowance and retirement. If you go for too much luxury, your other responsibilities could be compromised.
Home as an Asset
There are some circumstances that a home can be an asset. For example, if you have 2 homes, the second property can be considered an asset. Unless you are staying in both, one of them can be invested for capital appreciation or rental income. Even if your home may be rented out for income, it should remain as a lifestyle asset and not placed as a growth asset.
So, is it possible to make our first and only home an asset? Yes, in some cases. First, you can always rent out one or more rooms while staying as a home. Of course, a little inconvenience and some loss of privacy are inevitable. One way to increase privacy is to rent out the whole property and rent another smaller or cheaper place with a lower rent than your rental income. Second, you can rent out the whole property and live together with your parents or in-laws (seriously!). This way, you are most likely cashflow positive.
For a home owner, it is important to have mortgage insurance. In the event of a health crisis, the last thing you want to lose is both your income and the roof over you and your family at the same time. For subsequent properties, mortgage insurance is not as vital as that for a home. However, some property investors prefer to insure their investments as property is not a liquid asset and selling property in a bad market does not yield the best value. It is even more crucial for properties with negative cashflows as the shortfall has to be covered by the investor.
This article first appeared in the May 2013 issue of Financial Planning magazine published by the Financial Planning Association of Singapore (FPAS).