Saturday, August 10, 2013

Is Your Home An Asset?

For many people, their home is their largest source of debt (mortgage), and their largest asset. It can be the largest determinate of networth. But is the wealth derived from this kind of net worth real? In my opinion, no, because the home is a highly illiquid asset and one always needs a place to live. You can sell a stock or a bond at your advantage, but could you do the same with your home? Many people are buoyed by a rising house price, but it's difficult to derive a real benefit from this. If your home increased in a value by 10%, chances are your neighbour's did as well. And so even if you move, within the same housing market, you don't end up with any extra cash in your pocket.

Issues like these lead to the phrase house rich and cash poor. So how can you get real value from your home?

1. Move out of town. If you move from a higher value housing market to a lower value housing market, you can realize the difference. For example, a house in the city might be $500,000, but the same size place in a smaller community out of town might be $400,000 due to lower land costs and lower demand.

2. Downsize. Reducing your square footage, moving into a condo, will let you pocket the difference.

3. Renovate (then move). If you put some sweat equity, then you can make your house increase in value more than your neigbour's. You won't realize this gain, until you move.

4. Reverse Mortgage. By obtaining a reverse mortgage you can access the equity in your home. This is neutral on your net worth, as your liabilities also increase, but you change your illiquid asset of home equity into liquid cash.

Paying off your mortgage is a clear benefit. It reduces your interest and frees up cash for building your other assets. It has to be counted with your debt. But what about your equity. Should you count it in your net worth. In my case I do, particularly since the asset offsets the liability of the mortgage. (You can pay off the mortgage if you sell) However, I also track my assets excluding the home, to make sure that I am building up more liquid assets as well. I have two main financial goals, reduce my mortgage and build my liquid assets. My home equity is increasing, but I really don't get too excited, as I know that when I sell, I'll be paying that higher price to someone else when I buy a new place.

How much of your networth does your home represent?

This post was linked in: The Yakezie CarnivalAspiring BloggerFine Tune Finances

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