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 interesting comments written below one of the articles, namely the latter article, I had to chime in.
Last time I checked, a house was an asset. I can not even imagine what a house as a liability would be like. Kind of like an asset with a negative value. One possibly scenario would be if there were an infinite supply of houses and zero demand. But even that would only make a house free it would not lead to the house having a negative value. I can not do the mental gymnastics of considering a house as a liability.
I just had to pull up Gnucash to make sure I was right. I opened up a new file and created a default “chart of accounts” for fixed assets (which includes a home), homeowner expenses, and a home mortgage loan. Here’s what you get:
There is “house” right there under “fixed assets.” You will also notice “mortgage loan” there under liabilities. Some people seem to get confused by this distinction, as at least 2 commenters on Consumerism Commentary did:
RS said:
I agree that your home should be considered a liability…as long as I am paying my mortgage every month, then it is a liability to my cash flow.
mbhunter said:
I side with Kiyosaki on this one. My home is a liability because it costs me money. A rental with a positive cash flow is an asset. I don’t even consider my equity in my net worth.
Oh no, Kiyosaki is rearing his ugly head again. Fortunately someone stepped in to set them straight:
Sean said:
This line of thought (house being a liability) drives me absolutely batty every time I stumble across it. Your house is not a liability; your mortgage is a liability. An asset isn’t necessarily a money generating piece of property…
On Consumerism Commentary’s article, a professor is quoted as saying in “Ballooning equity doesn’t mean you’re rich“,
The right mind-set is to look at your house not as an asset, but as a liability, until you’re finally going to sell it and drastically change your living style. Obviously a house, something you have, is an asset, but the argument is by treating it as a liability. This way as your house’s value increases over time, you’re not lured into changing your lifestyle.
This does not make any sense to me, how you can treat a house like a liability one day and an asset the next.
Like I mention in my post, many people fail to account for the value that they derive from the personal residence. But the liability argument side does have a point. If I have a personal residence that costs $1 million but will rent for only $1,000 a month, should it be counted as an asset worth $1 million?
What if you were to sell that $1 million house and then turn around and rent it from the buyer for $1000 a month?
“If I have a personal residence that costs $1 million but will rent for only $1,000 a month, should it be counted as an asset worth $1 million?”
Where’s the confusion here? Of course it should be counted as an asset. Only the corresponding mortgage is a liability.
Why would the fact that you are collecting $1000 rental income per month change whether or not you classify your house as an asset? Your house is an asset (fixed asset); the $1000 rental income is an asset (cash); and your mortgage is a liability (long-term liability).
Of course, a house is an asset. Anything that can be converted to cash (sooner or later) is an asset. In my post I am simply pointing out that when people argue that it is a liability, they forget to take the imputed rent into account.
As long as i’m going to live in the house i own, even if its is mortgage free, the house is an asset with zero value. After all, i do need a house to live in. On the other hand, if i own another property, then it is an asset with some value.
It costs money to live in your house, even if your mortgage (your *financial* liability) is zero. This is because, like food, water and other basic necessities, housing is not free. You should see yourself as a consumer of housing. Since your house creates expenses, you should consider it a liability, even though it has value. The problem is, if you realize this value, you now need to pay for somewhere else to live. I suppose it could also be considered an expense, like rent.
Sorry Doug that is flat out wrong. Saying that because “your house creates expenses, you should consider it a liability” is ridiculous.
Gold bars create expenses as well as I need some place to store them, preferably in some secure storage that will cost money. By your logic a gold bar is a liability. I do not even want to try to defend the statement that a gold bar is a liability.
If you want to get technical, every expense could technically be paid from an accounts payable (which is a liability) which is then paid off from an asset (cash). So these expenses are liabilities but the house isn’t.