Why Your House is a Liability, and How to Change it Into An Asset

Why your house is a liability

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 ~

  1. Strictly speaking, a house is always a liability if you live in it – it takes money out of your pocket. And this doesn’t depend on whether you own it or not. The only way to make it neutral is if you manage to cover the costs of living in it by having lodgers – which is a pain for a family if the house doens’t have a separate part of it that is de facto an apartment.

  2. What do you think the average house size is in urban cities in Australia? In the US, they are averaging around 2,500sqft now from 2,000, 20 years ago.

  3. @Shaun – congratulations on your new arrival!

    But @Sam I think the average size in the UK is reducing, not increasing! Developers (those who haven’t gone under) put more and more houses on smaller and smaller plots. I guess we just don’t have the space! But smaller houses are cheaper to heat and it means that you spend less petrol going round the block to your friends!!!

    • Thanks John!

      The average land size here is reducing (anywhere between 3500 – 5000 square feet of land is common these days, but the house size has probably increased with modern living. Everyone want 3-4 bedrooms, multiple living areas and multiple bathrooms. As a result, most newly built houses have very small backyards.

  4. Yes, this often quoted misconception of “your house is your biggest asset” is often taken out of context and used as an excuse to buy a too big house. In the days that banks were careful with giving out mortgages and people had to pay off every month a part of this mortgage for 20 or 30 years, buying a house was like saving. It helped/forced people to save money and create their biggest asset. Nowadays, the too large and easy mortgages are not a help anymore but an obstruction to reach a degree of financial freedom.

  5. Yeah, there’s no way I’d rent my basement – or any part of my house – to anyone. I have two young children – talk about a liability? Someone I barely know sharing my four walls.

    By the way, Shaun, congrats on the new addition! It seems like just yesterday I had my second child – now my baby boy is two weeks shy of a year! Those late night feedings and sleepless nights will go by fast 🙂

    • Good article! I clean houses for a living and everyone lives in a house thats too big. Alot of space not used. Im also suprised that alot of people dont want to rent out the basement, there are some really good tenants out there. I rent a 41/2 with my boyfriend and rent out the extra bedroom for half the rent. The guy leaves during winter and still pays. Soon we will be able to buy a house and have plans to rent out the basment. ????

  6. I’ve never viewed my mortgage as a liability – after all, it usually costs more to rent a property than it does to pay the mortgage (escrow included) on it.

  7. I’m always amazed how many young families are struggling to keep up with mortgage payments on their 3000-4000 s.f. house and yet refuse to rent out a basement.

  8. Personally I feel for a house not to let it be a liability, one should go for renting a part of it. Otherwise the amount of money that gets wasted for the maintenance, makes the attachment and passion for self home go down the hill. Superb article nevertheless.