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Is your home/primary residence an asset or liability?

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Enter the great debate: Is your primary residence an asset or liability.
You may disagree with me on this point, but your home is in actual fact a liability.
 
Accountants will simply dump your home under the asset column to balance their books. That’s what they were taught.
 
Wealth creators take a different view. Firstly, an asset must:
  1. Put money in your pocket
  2. Generate a passive income stream that is sustainable
  3. Have the desired risk and return profile 
If you draw an income from your primary residence, then you can view your home as an asset.
 
One could do this by renting out part of your home or granny flat, which is not a bad way to use other people’s money to help pay off your bond.
 
If your home costs you money each month, then I’m afraid to say you have a liability on your hands. Remember, if you cannot meet your monthly bond repayments, the banks are going to go code red on your ass!
 
Even if your bond is fully paid off, you still have water and electricity obligations, rates and taxes, not to mention general maintenance and repairs.
 
One often reads about how your primary residence is your greatest investment. I’m not sure why considering that it costs you money to keep and maintain.
 
►The general thinking goes like this
 
Buy a home in a good area, live in it for a few years, sell it one day for a couple of million and whola, use the profits to buy a smaller house and retire comfortably.
 
Unfortunately this approach is extremely risky, and when it comes to wealth creation, extreme risk is a big no-no.
 
For one, it generally costs money to sell a house. Consider capital gains tax and estate agency fees for example. Secondly, It’s difficult to predict what house price growth is going to do in the distant future.
 
If you’re relying on the above approach, you need to somehow make sure that you generate a big enough profit to cover the selling costs, buy a new home and have something left over to live on during retirement.
 
By the way, according to the 2009 ABSA Housing Review, houses actually declined in value. Not a good thing when it comes to buying low and selling high.
 
What about Lotto earnings, Money market Account or Audi TT Coupe Are they assets?
 
The real asset here is a Money Market Account, as long as you earn interest income. The fact that you won the Lotto does not mean you acquired an income generating asset. It all depends on what you do with your earnings.
 
An Audi TT Coupe, if financed using borrowed money, represents bad debt. It is a liability. That doesn’t mean you should steer clear of vehicle financing for personal use, it simply means you’re paying money for an ‘asset’ that depreciates in value and has absolutely zero passive income potential. It’s seems to be general knowledge that you lose about 20% of your vehicle’s value as soon as you drive it off the floor.
 
At this stage of my life, my approach is pretty simple. If I had $50k (or more) to blow on a car, I’d rather purchase two property businesses and secure myself a passive income stream that is indexed to inflation.

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