On average, American’s spend 35% of their take home pay on housing. This is the single largest bucket of expenses most American’s have.
Is your primary home an asset or a liability? Below I have outlined my personal view on the classification of your home being an asset. I respect individuals opinions who might not agree with my stance 🙂
So here we go. This weeks Money Myth Monday’s quote:
To understand why I believe this is a myth, you must first begin with defining what an asset is. An asset, by my definition, is something of value that puts money into your pocket. A liability is something that takes money out of your pocket with no return.
Why Your Home Isn’t An Asset
By this definition, 99.9% of people who own homes don’t utilize their home as an asset, yet they think their home is the biggest asset they should own. By this definition, 99.9% of peoples homes are liabilities. 99.9% of individuals don’t realize any equity they have built up in there house is “fake”. Ooh let the waters swirl.
If My Home Is Not An Asset, How Can I Get It To Be?
The next logical question might be, so how do I turn my home into an asset if it is current a liability?
I feel there are two ways to do this. The two actions listed below are things I am currently doing. I am not giving advice, just informing you what I do.
- Option 1: House hack! House hacking is renting out areas and/or rooms in your home to others. Doing this allows for you to receive money back into your pocket each month. That by definition would turn your house into an asset and not a liability. I am currently doing this with my home. I purchased a 3 bedroom 2 bathroom home in Orlando and rent out the rooms long term. My mortgage is $1,777 per month and I currently charge $1,000 per month for each room individually. This brings me $2,000 per month, so I am not only turning my home into an asset, I am getting paid to live in my own home while I am paying down principal! If that isn’t a hack I don’t know what is! I recently started renting out the additional side room I have (it was meant for an office) for $600 per month. So now I am bringing in $2,600 per month and cash flowing $823/month.
- Option 2: Take out either a Home Equity Line Of Credit (HELOC) or do a cash out refinance to pull the equity you own out of your home and invest the money into another income producing asset. I do not recommend this option unless you are seasoned and know exactly what you are doing and why you are doing it. I am currently testing the waters with this and will provide an update of my experience with it. DO NOT pull out equity in your home to buy liabilities. If you think this is something that would be beneficial for you to do, you should only think of purchasing assets with the equity you are pulling out.
After reading this article, what are your thoughts on how you currently utilize your home? Did you purchase a home you can maximize the value from? Is your home putting any money back into your pocket each month? Don’t feel bad if it doesn’t. 99.9% of people are in the exact same boat. I am trying to be a little different by focusing on eliminating my largest monthly expense, rent.
- Understand the difference between an asset and a liability. An asset puts money back into your pocket while a liability takes money out of your pocket.
- House Hacking is an incredible way to significantly reduce or completely eliminate your single largest expense each month.
- The estimated equity you own in your home is of no value unless you sell your house or leverage the equity to purchase additional assets.
Are you willing to take the leap and begin turning your biggest liability into your biggest asset? 🙂
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