Are emotions an asset or a liability?
Is a house an asset?
TL; DR : A house is an asset, but not really an investment.
There is an argument that homes are assets, so no amount of money spent on a home is ever wasted. After all, you can always sell the asset.
I am describing this as an argument because I think it is deeply flawed. Consider:
- The market can crash and you cannot get the original purchase price of the home.
- This can happen when you have cash flow problems so you cannot support the mortgage either. The bank will get you to sell the house, possibly by foreclosing and selling it yourself.
- Bear houses. In order to keep the house up to par, you have to put money into it. Otherwise the house will decline in value.
- More expensive houses have higher costs. Taxes are directly higher. The utility costs are often higher with the size of the house.
- When your job moves you want to keep up with it. In this case, you will either have to sell the house or find ways to make up the cost.
So you can't always sell the asset (house) for what you paid for. You can waste money on a house.
However, there are many circumstances in which buying is better than renting. As a general rule of thumb, if you have been in one place for more than five years, it is better to buy than rent. This is because the equity you are building is valuable in itself. However, this value takes time to outweigh the transaction costs of buying and selling a home. So these are the five years that is a general estimate of how much time it will take to build enough equity to overcome things like transfer fees.
The point the author made is that you are better off buying or renting the cheapest home that you can stand than the most expensive that you can afford. When you buy the most expensive house, you will run out of money to do all the other things he asks you to do. You are better off taking that money and investing it in other things, possibly even real estate. That way, your wealth will increase.
He redefines the meaning of assets, which is a valuable asset in accounting. Instead of using the typical accounting definition, he wants to define assets as something that can bring you income. This is more commonly referred to as an investment. So we could change the wording so that a house you live in is not a real investment unless:
- You improve the house while you live there.
- Or house values go up so much that it doesn't matter.
The first is a lot of work. The second tends to be temporary. Eventually real estate prices stop rising and can even fall.
Another problem is that it can be difficult to take advantage of the higher price tag when you live in a house. Sure, you can move out. But you do this in a seller's market. Where can you get a replacement house from? With perfect timing, you might move into an apartment and sell the house. They rent for two years until the market collapses. Then you buy a new house. But what if it takes five years for the market to collapse? Or what if you wait too long and the market collapses while you're still in the house? Or what if something happens in such a way that it is impractical to move out of the house by the time you could do it?
Instead, if you buy a cheaper house to live in, then you can invest the rest of the money. You could even buy another home to rent out.
Now consider how this changes how you can take advantage of high prices. You can sell the rental home if you think it is overrated. Wait too long, you no longer have rent, you have cash. But you still make money on the rent. If you sell too early, you will only lose some profits. On the other hand, you lose the winnings and get hit from additional rental costs. That way you don't rent. You own your house. This avenue is much less risky than trying to profit from the house that you actually live in.
You don't have to invest in another home. You could diversify by investing in stocks and bonds instead. The returns won't necessarily be as good, but the risk is less.
Another option is a smaller mortgage. If you buy a more modest home, your mortgage will cost less. Less a loan is a guaranteed return.
Buying a more expensive home increases your costs. It may be possible to restore this on sale, but this is not guaranteed. It is safer to buy two houses for the same price. Then you can sell one without having to replace it. It is even safer to minimize the amount of the mortgage you take out and invest any leftover money in locations other than real estate. Of course, if the risk is lower, the potential reward is lower.
The advice that you should live in the cheapest house you can stand is good financial advice. You have more money to invest in other things.
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