Asset or Liability? Primary Residence

Is our home an asset or liability?

The answer depends on how we define “asset.” 😉

According to the Oxford English dictionary it’s a a useful or valuable thing or person. Investopedia defines asset as a resource with economic value that an individual, corporation or country owns or controls with the expectation that it will provide future benefits. 

According to these definitions a home is definitely an asset, 🙂 not a liability.

However I’ve also heard some people say that an asset has to generate an income or be cash flow positive. According to this rule a primary residence is not an asset. But personally I think an income generating asset is simply a type of asset but not all assets have to follow that rule. Kind of like how a blueberry is blue but not all berries have to be blue, lol.

For accounting and net worth calculation purposes it’s paramount to count a home as an asset. Otherwise we would run into problems like the following.

Year 1: We have is $100,000 in savings.
Net Worth: $100,000

Year 2: We buy a $400,000 house using $100,000 as our down payment.
Net Worth: -$300,000 because of the $300K mortgage.

Year 3: We sell the house for $400,000.
Net Worth: $100,000

As we can see, the net worth progression swings wildly from one year to the next. This creates a faulty balance sheet that doesn’t represent the reality of our financial situation. However if we include the value of our home as an asset then our net worth chart will become more realistic and less volatile.

Some people don’t consider their homes to be an asset because they say you can’t spend your kitchen. However to me that simply means a house isn’t a liquid asset. But it’s still a valuable property. There are ways to unlock that value such as getting a secured line of credit or reverse mortgage. We can also rent out a bedroom, a basement suite, or a garage to generate passive income. So in a way we can spend our home, just not in a traditional sense.

But one suggestion to keep track of our liquid assets is to create two separate net worth statements. One to determine our liquid net worth which only includes stocks and other liquid investments. The other to keep track of our overall net worth, including our home’s value. 🙂

In a financial context assets are regarded as having monetary value and real estate certainly fits this description.

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Random Useless Fact:

In 1999 Google asked 16 students to test out their search engine. Upon reaching the site, they sat still for 45 seconds…just staring. Google finally asked what was wrong. All 16 responded the same: they were waiting for the rest of the page to load.