Millions and millions of Americans rely almost exclusively upon the equity they have built up in their home as the sole and only measure of their net worth. They are what are referred to as house poor –“House poor” describes the situation of a person who spends such a large portion of their income on housing expenses, including mortgage payments, insurance, taxes, maintenance and utilities that they have trouble affording much else. When they need to do a remodel, or make a large purchase they don’t have the cash for, they refinance their home or open a HELOC (Home Equity Line of Credit) and then use their home like an ATM machine. This practice back in 2008 showed when the tide went out, who was in the water naked. The vast majority view their home as their biggest asset. I would like to argue that their home is their biggest liability. Let’s first define what an asset and an liability are:
An asset is something that pays you.
A liability is something you pay on.
Simple, straightforward and easy to understand.
When I look at all the things I have to pay to have my house, and I do very much love my house, the list is rather exhausting:
- Property taxes
- Heating & Cooling
- General Maintenance
- Emergency repairs
Maybe I’m the exception and I’ve just simply had a run of bad luck. However, in my first home while my wife & I were out of town over the 4th of July, our master toilet broke and we walked into our front door hearing a waterfall. In the home we are in now, our basement has flooded twice, and our upstairs bathroom leaked causing a few thousand in damages – all from different causes. Although we had insurance we still had to pay, and with two of those situations we didn’t submit a claim because it would have barely been over the deductible and raised our rates from filing a claim.
My point is, if you own a home, it’s costing you quite a bit in outgoing monthly cash flow. By definition, that is not an asset. Millions of people found out in 2008 that their homes were definitely NOT an asset when the housing market substantially dropped and they owed more on the note then the home was worth.
The moment you do sell the home and realize a profit, at that moment your home became an asset, but up until that point, your home was very much a liability. When you calculate your net worth which I highly recommend starting that process, you will not list your home on the primary spreadsheet even if you have positive equity.
Unless your home is also generating positive cash flow each month through renting out a section or a room, or Airbnb while you travel (which will be very difficult to create enough cash flow to outpace the monthly expenses), then it’s a liability and you put it in a separate column.
Do you have a “lazy asset?”
If your entire net worth is wrapped up in your home because you’ve aggressively been paying it down because you subscribe to the zero debt philosophy, I’d like to congratulate you on the one hand for your hard work and efforts, but on the other hand urge you to consider a new way of thinking. You have what’s called a “lazy asset”. A lazy asset is equity you own that is not generating cash flow for you that very much could be, or is generating very minimal that could be vastly be channeled into a different direction.
For example, if you own a house valued at $300,000 and the house is paid off, you have $300,000 in opportunity cost. Yes, you have no monthly payment, however let’s say you were to borrow against the value of your home and refinance. At today’s low interest rates, you could get a loan for 3-4%. If you don’t feel you can safely outpace 4% in investing those funds, then I don’t mean to insult you, but you are simply not Financially Intelligent. I’ve been in this position before so there is no judgement, it’s simply a challenge to learn, grow, and develop your investing skills so you can grow wealth quicker and more safely than what you’re doing right now. There are plenty of safe, collateralized assets that you can buy that exceed 10% ROI. We will be diving into all of these types of opportunities on my platform. In order to grow wealth, it requires a different way of thinking, and I’d like you start thinking of your home as your greatest liability and avoid being house poor at all costs.