Shaun’s note: Unfortunately I haven’t fully surfaced again since my wife gave birth to our second child. Both our kids have been pretty great and my wife is doing all the hard work with feeding, but we are both feeling the effects of reduced sleep and attempting to get things done in less time (kids are great for productivity!). Fortunately there have been some very nice members of the Yakezie challenge that have helped me out with some gust posts to keep things ticking over here in the mean time. I promise to be back soon, but today I hope you enjoy this guest post by Invest In 2012.
The age old maxim “buy a house because it will be your biggest asset” is false. For 99% of Americans, their house isn’t an asset, but instead their biggest liability. Let me explain why.
You technically don’t own your house
99% of Americans used a mortgage to fund their house because they don’t have enough money to pay cash upfront. What you end up doing is having a chain tied to you: you must pay X amount of money for Y amount of months in order to pay off the total mortgage of that house. So your house becomes your biggest liability: you must pay off hundreds of thousands of dollars, and you can’t miss a payment, or else the bank will seize your home and evict you!
For the rich, on the other hand, real estate becomes an asset that often comprises a huge chunk of their portfolio. This is because the rich aren’t stuck to their house: they can pay off the entire mortgage at any time they want. They are not stuck to paying X amounts of dollars for Y months like the average person is.
So in reality, if you’re an average person with a big mortgage, you’re stuck in lifestyle servitude. You’re entire life revolves around that big house (which is a liability); you have to continue working like a dog just so that you don’t miss a mortgage payment, and you have to cut back on the vacation spending and all the other good stuff because you simply can’t spend too much! In other words, your house is like a chain that keeps you from financial freedom.
Here’s how you can change it into an asset
The obvious solution is: lighten the financial load on yourself. Do you really need a 3000 sq. feet house for 4 people? If you were to rent your basement, then that rent money is (in often cases) enough to pay for a big chunk of your monthly mortgage payment. So if you don’t really need such a big house, just rent out a portion of it to tenants! That way, you’ll have a real cash flow generating machine, which is exactly the definition of an ASSET.
If you’re uncomfortable about renting your basement, or if you can’t find any suitable tenants, then just buy a smaller, less expensive house. The less you have to pay for your mortgage, the more breathing space you’ll have (financially speaking). And the shorter your mortgage life span is, the faster you can convert your house from a libability into an asset (mortgage to mortgage-free).
Invest In 2012 writes about the financial markets, investing, and much more! Read Invest In 2012’s great story on What It’s Like to Rent Your Basement.
Image by ~ Pil ~