By Thomas Carroll, REALTOR®
You hear investment gurus trumpet the idea that your home is not an asset, it is a liability. To be blunt, I think that is crap. Your mortgage is a liability, but your home is an asset. If you purchase a home, it is an investment and one of the biggest investments that many of us will ever make. However, there are differences between investment properties and primary residences that are good to understand.
When it comes to real estate investment there are 4 ways to build wealth: cash flow, debt paydown, tax benefits and appreciation. Let’s start with cash flow. There is no cash flow (unless you are house hacking) coming from your primary residence and to my understanding, this is the cornerstone of why many people argue your home is an expense, not an asset, likening it to your monthly car payment. You as the homeowner are responsible for all of the taxes, insurance, mortgage, maintenance and so on. Compare this to an investment property where the tenant pays you rent which is then used to cover expenses and any surplus goes in your pocket. So, if you were solely looking at it from a cash flow perspective, then yes of course your home is an expense and not an asset. But that is a very one-dimensional argument and real estate is not a one-dimensional asset. Cash flow is not a precondition for something to be an asset. There is no cash flow coming from gold, but it is still widely considered an asset.
Debt paydown is present with both investment properties and primary residences. However, the terms on the debt for your primary residence will be much more favorable compared to commercial or investment property loans. So, owning your own home generally gives you access to debt terms that an investment property just cannot compete with. I understand debt is a liability no matter how you slice it. Not being able to cover expenses is one of the greatest risks that investors and homeowners face. But if you conservatively use debt to buy assets like a home, it can be a very powerful tool.
One of coolest tax benefits of an investment property is depreciation. Each year you get to deduct a portion of the value of the improvements (buildings, not the land itself) against your income. Sadly, you can’t do this with a primary residence. However, with both investment real estate and your primary residence you can deduct your mortgage interest against your income.
Last but not least, we have appreciation which is certainly not exclusive to investment properties, and it is the main thing separating your mortgage from your car payment. That is really the key here. It does not matter if a property is owned as an investment or a primary residence, it will likely appreciate over time.
To wrap all of this up, when it comes to a primary residence, while you will not receive monthly cash flow and cannot take advantage of depreciation, it will still generally appreciate in value over time, provide tax benefits and access to leverage. There are expenses associated with owning your own home but there are expenses associated with owning any asset. For stocks think trading commissions, mutual funds think management fees and gold think storage costs. Your home can be a great asset so contact me today and let’s get started along your path to home ownership!