Buying a house - Asset or Liability
We often hear people saying we should buy a house because it’s an asset. My dad used to tell me that when i was young and is still telling me now that buying a house is an asset not a liability.
Maybe when i was younger, i would agree with my dad’s statement but not now. A house is a liability unless it’s generating income for the property owner.
Why i say buying a house is a liability? It’s plain simple. I will just do a simple case study on it.
Case I
Mr. Ali buys a house. The house is use as a residential house where Mr. Ali stays in the house with his family. Most people will take a house loan of around 20 years.
As we all know, a residential house does not generate any income to Mr. Ali. He is paying his loan, eletricity bills, water bills and so on. In short, he is not making any money from his house.
How could we call the house bought by Mr. Ali as an asset?
Case II
James bought a house. James does not stay in the house but is renting his house away to others. With this, James is generating income and making money from the purchase of his house.
With this, we can say that James bought the house as an asset and not liability.
Conclusion
Buying a house can be an asset in a certain prospect or vice versa. In this scenario, Case I is a case where a house is a liability whereas Case II is a case where buying a house is an asset.
So do you all agree with my statements? Comments are welcome!
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5 Responses to “Buying a house - Asset or Liability”
By LOKE on Sep 24, 2009 | Reply
To me, as long as we can afford it, the house is an asset…
By khepok on Oct 20, 2009 | Reply
in 2001 i bought a house for 236k, i juz sold my house for 448k. liability? i think NOT!
By Kampung Boy on Oct 21, 2009 | Reply
To khepok, i agree with you if you can make money with the house then it’s an asset but if you are staying in that house, then it’s a liability because you are paying those installments, electricity, bills and etc…
By thaichai on Mar 27, 2010 | Reply
To Khepok…you’ll only be earning returns if you bought your house with cash.
If you have taken a loan, you would have actually been losing money.
236k to 448k in 8years equals to 8% gain pa.
Average interest rate for housing loan should be around 4~5% pa. Hence, your effective gain is only 3~4%. Compared to risk free FD which is about 3.7%pa during early to mid 2000. Therefore no gain.
Loss in opportunity. Should you have invested your 10% ~ 20% downpayment plus your 8years installment in any shares (assume Public Bank). You would have gotten 5% dividen yield and average 6% return pa. (price was RM6 in 2001 and it was RM10 in end-2009, RM11.60 now)
Kampong boy’s definition was taken from Robert Kiyosaki’s Rich Dad book where if something is not giving you positive cash flow, then it’s a liability. Which is a huge contrast from actual accounting term.
By Kampung Boy on Apr 2, 2010 | Reply
@thaichai : Right on the spot. Don’t forget khepok, does not mean when you want to sell your house you will get a buyer will buy it straight away. No liquidity there as well.
I am sure you have spent money in renovating the house, buying stuff, paying water bills, electric bills, etc etc.. This makes up to it…
There is no right or wrong in your views or thaichai views but to me it is still a liability..
Unless your home is really generating income for ya! ^^