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Personal Residence: Asset or Liability

March 28th, 2006 ·

Just like the debate on RRSPs versus mortgage paydown (check the comments to the previous post), the debate on whether a personal residence is an asset or liability pops up every now and then. The reason the debate endures is that both sides have valid arguments:

Asset:

  1. Everyone needs a roof over their head and a house provides value in the form a rent that would otherwise have to be paid. A personal residence can be thought of as a bond that provides interest that could be used to pay an equivalent rent with the added benefit that the “interest” is tax-free.
  2. The equity built up in a home can be tapped using a secured line of credit, which can be used to build a diversified portfolio of assets and the interest on the loan will be tax deductible.

Liability:

  1. Unlike assets like stocks, bonds or even income properties, any increase in the value of a personal residence cannot be realized unless a person is willing to downshift or move to another area where homes are cheaper. Increases (or decreases) in the value of a home have a largely neutral effect on the net worth statement.
  2. Houses have liabilities like mortgages, property taxes, maintenance and other expenses attached to them.

I personally view our residence as an asset because of the imputed value that it provides. If we don’t own a house, we have to live somewhere. Let’s say that we rent a two-bedroom apartment instead (we live in a detached two-storey home, but people tend to rent a smaller place than they own), which would cost us, say, $1,000 a month. So, our house provides us a value equal to $12,000 a year (yes, I am ignoring property taxes, maintenance etc., but then a house would rent for $1,700 per month). Assuming a 5% risk-free interest rate and a tax rate of 25%, I would need a portfolio of $320,000 to produce an equivalent cash flow. As long as the market value of the personal residence is less than a reasonable estimate of its equivalent value, I would count it as an asset.

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17 responses so far ↓

  • 1 Investing Intelligently // Mar 29, 2006 at 2:49 am

    A House is an Asset…

    After seeing two articles in the past couple weeks discussing whether or not a house is an asset or a liability (”Personal Residence: Asset or Liability,” and “Your House: Asset or Liability?“), and seeing some of the interestin…

  • 2 James // Mar 29, 2006 at 6:12 am

    I don’t include assets like cars and houses in net worth calculations because they don’t help further my goal of retirement. They are certainly worthy purchases and in my case a neccessity of living, but they only ever cost me money. The house is cheaper than renting in my case, so it creates savings over other alternatives but it is a net drain on my savings not a contributor to them.

  • 3 Canadian Capitalist // Mar 29, 2006 at 6:27 am

    James: A fully paid-off house surely helps your retirement goals. You don’t have a mortgage to pay every month anymore! Housing is a big chunk of our total expenses (18% according to StatsCan not including taxes or utilities or maintenance, which sounds about right). You will be saving money that you would otherwise pay in rent.

  • 4 Northern Tim // Mar 29, 2006 at 9:35 am

    I have to agree with the idea that your house is bit of different beast when it comes to an assest. If you own your house that reduces your required income for retirement significantly, but at the same time it does have maintance cost to keep it.

    So perhaps the way to look at it is your house is only an assest when the local market has exessively overvalues your home and you have the option of moving to a lower cost market. Otherwise it your shelter and the only benifit of paying it off is the interest savings during the first 5 years or so of a 25 year lifespan.

  • 5 James // Mar 29, 2006 at 10:50 am

    Cdn Cap: I never said I didn’t want a paid off mortgage, in fact I mentioned it is better than the alternative…rent. But it is not better than savings. Unfortunately I can’t stop paying the mortgage.
    Owning a house free and clear doesn’t get me closer to retirement, it makes it easier to save for retirement.
    A $1,000,000 home with no mortgage gets me no closer to retirement than a $100,000 apartment with no mortgage, savings or pension are what gets me to my retirement.

  • 6 James // Mar 29, 2006 at 10:56 am

    What I am getting at is if you are into amassing a huge net worth…include your house. If you just want to retire consider the cash flow only…your house is and always will be a (necessary)drain on your cash flow…which ultimately impedes your cash intake.

  • 7 Investing Intelligently // Mar 29, 2006 at 12:39 pm

    James said: “I don’t include assets like cars and houses in net worth calculations because they don’t help further my goal of retirement.”

    This bugs me. People saying things like cars are not assets. Cars are assets and net worth is what it is. It is (assets - liabilities). If you don’t want to use net worth (as defined) as some measure of progress towards your goal of retirement, then don’t. Split up your assets into assets that you think “further your goal of retirement” and those that don’t. Call your modified net worth your “nest egg” or something.

    A car is still as asset. If you are in a bind you could sell it for it for its original value minus its depreciation (an expense). If you crash it, your insurance company will pay you cash in the amount of its original value minus its depreciation.

  • 8 Required // Mar 29, 2006 at 1:21 pm

    Your house is an asset, your mortgage the liability.

    Anything you can convert to cash (quickly or not) is an asset. If it doesn’t help further your retirement goals, so be it.

    Personally, if I had a $1 mill paid of home, I’d sell it as when the kids were on their own, downsize, and retire. (See, here owning the house furthers my retirment goals)

  • 9 Canadian Capitalist // Mar 29, 2006 at 1:49 pm

    Hmmm. Required, I made almost the same comment on Dave’s site.

  • 10 James // Mar 29, 2006 at 3:31 pm

    I never said they weren’t assets.

    I also never said I would prefer a 100,000 apartment versus a $1 Mill home.

    Assets are great, but unless they produce income they don’t get me closer to retirement.

    Selling the home is not part of the equation. Thats a choice I can make once the mortgage is paid, after umpteen years of mortgage, taxes etc…

  • 11 Investing Intelligently // Mar 29, 2006 at 3:53 pm

    James: good point, you never said they weren’t assets, but you did say that you don’t include them in net worth calculations, which implies that either a) you don’t think they are assets or b) you are not actually calculating net worth but something different.

    “Assets are great, but unless they produce income they don’t get me closer to retirement.”

    An asset like a primary residence doesn’t always produce income and you are right it doesn’t really do much for you unless it is spewing out income or you are planning on selling it before dying. However paying down the mortgage liability does get you closer to retirement.

  • 12 James // Mar 29, 2006 at 5:59 pm

    You’re right, I’m not calculating net worth in the true sense. Not sure how to classify it; I guess its the worth of my liquid and saleable assets since I can’t sell my house or car. Well I can, but it would be very counter productive since I’d have no place to live and no way to get to work.

    I wouldn’t say they aren’t assets, an asset is anything that can be bought or sold for a price. Houses and cars definately fall into that category.

  • 13 DIY Finances » Blog Archive » The Asset with Liability Written All Over it // Mar 29, 2006 at 6:57 pm

    [...] There is quite the debate (Canadian Capitalist and InvestingIntelligently) going on about whether or not your primary residence is an asset or a liability. [...]

  • 14 Ray // Apr 3, 2006 at 11:48 pm

    A paid home does generate income. The income is coming from you. From an accounting point of view, you’re both the landlord and the tenant. It’s good to seperate them to get a clearer picture of your incomes and expenditures.

    My take is that my house is an asset.

  • 15 Julie Ali // Jun 23, 2006 at 8:31 pm

    A house with a mortgage is definitely a liability. Currently, it is difficult to buy a new house in Alberta for under $300,000. Even with a 25% downpayment, you still have to take out a hefty mortgage. Although interest rates are low right now, they will probably go up. If you have both the husband and wife working to service this debt right now, what happens when interest rates go up and they can’t find the cash to pay for the mortgage payments, property taxes and insurance (they go up too)? The only thing left to do would be to put the thirteen and fourteen year old kids in the family to work at the local grocery chain to service the debt load associated with this asset. No, a house with a mortgage is definitely a liability and furthermore, this liability impairs your ability to save money, paydown other debts such as student loans and fully fund your retirement.

    Renting may mean that you face increases in living costs without the benefits of having your personal home appreciating in value but so what? You can earn money in other ways other than dumping your cash into an illiquid “goldmine”. The only reason to buy a house is because you want one to live in - it is a home, not an asset.

    To decrease the impact of this “asset” on your financial success, I would suggest the following:

    a) first pay off all other debt (Credit card, personal loans, car loans, RRSP loans etc) before taking on a mortgage debt

    b) have an emergency fund of $5000 (or more)

    c) save 25% of the downpayment

    d) pay the mortgage biweekly, overpay each biweekly payment, pay lump sum payments of the principal and pay the darn thing off in under 15 years.

    The only way that a house, your personal abode, the place where you raise your family becomes an asset is if you own the house free and clear and sell it in the bubble market that is currently Calgary and downsize to a village in Nepal. Otherwise your asset is
    not an asset for you and but is certainly a cash generating machine for your bank.

  • 16 The obligatory “Is your house an asset or a liability” post - myinvestingblog.com // Oct 11, 2007 at 8:44 pm

    [...] LazyMan, Jim, Matthew, Smith Financial Place, MyMoneyBlog, Associated Content, FreeMoneyFinance, Canadian Capitalist, MoneyMonk, Crazy Engineer, Yahoo!, Watson Inc, Project Senso, Google Forum, just to name a [...]

  • 17 SOL // Sep 14, 2008 at 12:14 am

    You house is an asset. The networth of the asset will of course depend on the existing liability on it….so I agree…pay the damn thing off ASAP. The question is, is it worth liquidating a non-rrsp mutual fund to pay off the mortgage or keep paying the mortgage and invest in the non-rrsp at the same time. This way you can increase your non-rrsp portfolio and gain some interest. Isn’t this how banks make money?

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