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Is Your Home an Asset or a Liability?

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Buy to Let  B2L  Investment Property Assets  Investment Property Liabilities  Investment Liquidity 

By - Wednesday 30 June 2010

Depending on what you read, there would seem to be a great debate as to whether your own home (your primary residence) is an asset or a liability. Initially the answer might seem obvious, but on closer inspection, is it actually that clear? We take a closer look at what's what, in an attempt to specifically define exactly where the answer lies.

Firstly, we need to differentiate between an asset and a liability.

  1. The general consensus would suggest that an asset is something that is immediately liquid (for example cash) and tradeable or exchangeable for something else.
  2. The said same consensus would also suggest that a liability is something that has a cost attached to it, (mortgage payments for example) and not immediately liquid.

The pure difference between the two is fairly straight-forward. An asset is something that is liquid (i.e. cash) whereas a liability is something that has costs attached.

So, how does this affect property ownership (with respect to the homeowner) and property for investment (Buy to Let)?

Given the two statements above, a primary residence can certainly fall into the second category as a liability, given that most owners have a mortgage attached to their property, and virtually no house is immediately exchangeable for cash. An investment property (eg. a Buy to Let) provided its income is greater than its costs, technically appears to fall between the two by generating positive cash flow, although not being liquid.

This then raises statements such as "I can release equity on a property". No one is going to deny that you can, but in the bigger picture, whilst equity can be raised, this in turn results in an increase in liability on the property.

On the whole, it would certainly seem that a primary residence, at least short term, is a liability. However, there is yet another angle to be considered.

What if you have no mortgage and you own the property outright?

In the case of a primary residence then, provided the local housing market is rising and your property is in reasonably good order, arguably your own home in this case is an asset over the long term.

With respect to an investment property that is rented or leased out, given that the property is providing positive cash flow, then it would be deemed to be an asset.

If the long term outlook is applied to either type of property, many people over the last 20 or 30 years will have seen a significant rise in the overall value of their property (capital gain). For most this would negate the previous statements meaning they could deem their house both an "investment" and an "asset". However, we still need to account for the fact that you still need somewhere to live, and that is still a cost. (Whether you own or rent the property you reside in from that point forward). The fact that your primary residence is gaining value, that value cannot be realised until the property is sold.

The only real situations arguably when a primary residence can be deemed an asset as opposed to a liability are as follows.

Long Term: If your house is increasing in value greater than the rate at which your mortgage rate/inflation/maintenance costs.

Short Term: When you no longer have a need for the house, a morbid thought but inevitable, when you die.

In conclusion, there is no real definitive answer that can be applied in a "one size fits all" manner. The fact ultimately remains that your personal circumstances dictate whether your property is an asset or a liability. The chances are if you live in it, and don't own it outright, then it is a "liability". If it is a Buy to Let, with positive cash flow, then you have an "asset"!

What are your thoughts? Tell us in the comments section below!

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*This page is provided for information purposes only and should not be construed as offering advice. IPIN is not licensed to give financial advice and all information provided by IPIN regarding real estate should never be treated as specific advice or regulations. This is standard practice with property investment companies as the purchase of property as an investment is not regulated by the UK or other Financial Services Authorities.

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