Wednesday, April 12, 2017

Your house may be a liability


Many people think they know what an asset is. For instance, you probably think your house is an asset—but it’s not. The truth is that just as there are two definitions of an asset.

Accountants use one definition that requires lots of financial calisthenics to make people and companies feel richer than they really are. This keeps them employed and their clients blissfully ignorant.

The rich use another definition grounded in simplicity and reality. An asset is anything that puts money in your pocket and a liability is anything that takes money out of your pocket.

Your house is not an asset because it takes money out of your pocket each month. Even if you own your house outright, you still have to pay for the taxes, maintenance and more out of your own pocket.

Spending on expensive vacations can be a liability
But if you own a rental property, that can be an asset—if it puts money in your pocket each month in the form of cash flow. When your tenant pays rent, they cover your mortgage, maintenance, taxes, and more.