Is your house an asset?
Maybe! It depends. We are often told that a house is the best investment we can make. However, this is only true if we use that same house to produce income; in this case - rent. If that house is not producing an income, then it is not an asset.
Even if you have rent coming in, you have to compare that to the amortization schedule to see what that is compared to the principal paid that is building your equity. There are instances where your net operating income can be less than the principal paid. In this case you are losing money.
An asset is something that puts money back into your pocket.
A liability is something that takes money out of your pocket.
Ideally, for a single family investment to make sense, you have to ask, will this property cash flow and what will be the return on investment? Is the rental income greater than all your expenses, reserves, and debt service/ mortgage? Also, banking on appreciation should not be a justification for the purchase of a home. Appreciation should be an added bonus since single family homes are subject to market comparables which you have less control over.
This is why when we buy multifamily properties, first we ensure that they will cash flow positively under conservative and insulated assumptions. Second, we strive to increase the value of the property almost immediately through forced appreciation, as the value of the properties are based on performance, or the net operating income, unlike single family residential homes. There are a number of ways to increase the net operating income in multifamily properties because they are larger properties with more units, and therefore more opportunities to add value across the property.
So how does knowledge of what an asset is and what a liability is help you achieve financial freedom? It’s very simple.
Live below your means. (There are plenty of people making six figures a year who live paycheck to paycheck). Although they may make a great living, they will always have to work to continue to generate that income. Don’t save your money to save, save your money to invest.
Buy cash flowing assets like real estate (not expensive residences, cars, boats).
As cash flow builds, re-invest it into additional cash flowing assets to increase the velocity at which cash is flowing back to you and to increase your streams of income.
