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MBW| CONTENTS IS YOUR HOUSE AN ASSET OR A LIABILITY IN DISGUISE? BY TUMO MODIMOENG Ask an accountant this, and they will tell you it is an asset. Ask someone in business, and they will tell you it is not! This is one of the most controversial topics in the property sector right now with a lot of ‘Aha! I told you so moments’. An expert real estate investor once had realtors stop sending him Christmas cards just because he wrote that a house is not an asset in his book! 14 <strong>MorataBW</strong> March 2021 Photo by Cindy Tang Unsplash
PROPERTY |MBW FINANCIAL PERCEPTION From a finance standpoint, a house is an asset as it can bring you money; you can either sell it or use it to borrow money as a security. Financiers argue that the value of the property appreciates over the years. But, that is not always the case; your property can depreciate. What is an Asset? According to the Oxford dictionary, an asset is a thing of value, especially property, that a person or company owns, which can be sold to pay debts or make money. Investopedia describes an asset as something that adds an economic value and can generate cash flows, i.e., you can sell it to get money. What is a Liability? According to Investopedia, a liability is something a person or company owes, usually a sum of money. Oxford explains a liability as to the state of being legally responsible for something. Thus an asset will earn or can earn you money whilst a liability costs you money to have. So does your house bring you money, or it takes away from you so much so that a slight increase in electricity tariffs digs holes in your pocket? BUSINESS PERCEPTION In business, a residential house is a liability as it does not generate any income at the moment whilst the owner stays inside. According to Real Estate investor and author of Rich Dad, Poor Dad, Robert Kiyosaki, “an asset is something that puts money in your pocket and creates some cash flow, whereas a liability is something that takes money away from you.” Kiyosaki firmly states that a house is not an asset, rather a liability. “Your home is your bank’s asset if you could read a financial statement.” WHAT MAKES YOUR HOUSE A LIABILITY? A mortgage is a loan you get from a bank to purchase or build a home. Repayments are lengthy and extend for up to 20 years with predetermined monthly payments. For years, the borrower will repay the debt, with interest, before the loan is cleared and the property is owned. So, the mortgage house is not yours, because it is the bank’s before you clear it. On average, for 20 years of the mortgage payment, you will have paid interest of over P1 Million ($91,300.02) on a P1 Million mortgage totalling more than P2 Million ($182,600.04) in total payments. Should you not afford the instalments, the bank will repossess the house and auction it. Note that the mortgage costs more than the value of the home, and there’s another thing called the real estate crash when demand and value for homes fall dismally. Therefore, it is not always assured that the value of the house will appreciate, many considerations come into play, such as location, size and many others. You could be paying a lot more than the value of your home. SHOULD YOU TAKE A MORTGAGE? It depends on what you are taking it for, and businesswise, it is advisable to take a mortgage for real estate March 2021 <strong>MorataBW</strong> 15
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