Your Home is Not an Asset! (2024)

Most people consider their home to be one of their biggest assets. However, from a financial perspective, this viewpoint is misguided. Your primary residence is not actually an asset - it's an expense and a liability. Here's why:

An Asset Provides Income

By definition, an asset is something that has the potential to generate cash flow and profits for its owner. Good examples of true assets include stocks, bonds, rental properties, businesses, etc. These assets either pay dividends/interest or spin off cash from operations that end up in your pocket.

Your home, however, does just the opposite. Rather than generating income, it costs you money through mortgage payments, property taxes, maintenance, utilities, and other expenses. It represents a recurring liability that drains cash from you rather than putting cash in your pocket. A home is better characterized as an expense or money pit rather than an asset.

Appreciation is Not Income

One common argument is that even if a home doesn't generate income, it should still be considered an asset because home prices tend to appreciate over time. While home price appreciation has occurred in many markets, simply holding an asset that goes up in value doesn't make it a productive asset from a financial standpoint.

When a stock or business asset appreciates, the owners eventually benefit by being able to sell the appreciated asset and unlock the gains in the form of cash profits. But with a home, the appreciation is purely on paper until you sell. And even then, homeowners often just plow the gains back into an equally or more expensive home, rather than having liquid investment assets. Appreciation alone doesn't generate income or make a home a productive asset.

Leverage and Risks

Another argument is that homes can act as leveraged investments using mortgage debt. While leverage can amplify gains during times of rising prices, it works in reverse as well. Homes are highly leveraged investments that see both ups and downs amplified compared to unleveraged assets.

There's also the idiosyncratic risk of being overly exposed to housing in one specific location. And of course, foreclosures loom as a risk of highly leveraged home investments going bad.

The bottom line is that while homes can build wealth through appreciation in some cases, they have substantial risks, costs, and lack of diversification. The wealth effect is also often trapped as home equity until selling and downsizing late in life. For these reasons, homes are better viewed as a consumption vehicle and expense rather than an ideal investment asset.

Renting vs. Buying

For many, renting and investing money in income-producing assets is often a better financial decision than buying a home, when examined impartially. With renting, you trade the mortgage payment for a rental payment, but avoid the other costs of homeownership like maintenance, property taxes, insurance, etc. This frees up funds to invest in assets that can generate income and returns.

While there can be non-financial reasons for wanting to own a home, it's important to understand that from a pure financial viewpoint, it represents a liability and money pit rather than a productive asset. The mortgage payment, property taxes, maintenance, and other expenses all detract from your financial wealth rather than contributing to it.

Earmark Separate Investing

Those who do choose to buy homes should separate their investing activities from their home purchase. The home can serve as nice housing for your lifestyle, while a separate portfolio of stocks, bonds, businesses, etc. act as your investment assets. Too often, people make the mistake of treating their home as their investment and underfund their investment accounts as a result.

By renting and investing separately, or treating the home strictly as a place to live rather than an investment, you'll end up being far wealthier in the long run. Your investment portfolio will be able to grow uninterrupted by draining housing expenses. And your asset allocation will be more optimal and diversified.

So while the home may be the largest "investment" many people make, it's important to understand that it does not actually fit the definition of a productive asset. It's better viewed as a lifestyle expense and liability. Make sure to keep separate buckets for housing costs and investment vehicles so you build your wealth efficiently.

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