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Updated about 1 year ago, 09/10/2023
Is a house hack a liability or asset?
It is a common argument whether buying a home is considered an asset or liability. IMO that home is a liability b/c it takes money out of your pocket, not back in. Even though, yes it is appreciating.
Now, my question to the BP community...
If I buy a house hack and it decreases my living expenses to $500/month, would you consider that house hack a liability or asset?
Excited to hear everyones thoughts!
@Ben Einspahr, its largely semantics I think but my answer is BOTH!
The portion you rent either a room in your home or a separate unit on the same property is an asset and the portion you live in is a liability.
You thinking about it as "decreasing your living expenses" is a semantic distinction. You could look at your liability as a prorated portion of the property's expenses and the asset (rented out portion) as bringing in income with its expenses being its prorated share of the property's expenses.
So, I would look at those things separately!
All depends how you purchase your house
If you buy it cash, it is an appreciating asset
If you buy it with a mortgage, you have a liability (your mortgage) due every month.
Unfortunately, you need a place to live and there is no way around that. And many people can't afford any house in cash in any market. So, we must borrow!
Still usually a better financial option to buy in the long term than rent
- Alan Asriants
- [email protected]
- 267-767-0111
A cash flowing rental property is an asset. The space you need to live and pay for (whether you pay your business rent or not in a formal capacity) is your liability. Better to have that liability to pay yourself, than to someone else!
Quote from @Ben Einspahr:
It is a common argument whether buying a home is considered an asset or liability. IMO that home is a liability b/c it takes money out of your pocket, not back in. Even though, yes it is appreciating.
Now, my question to the BP community...
If I buy a house hack and it decreases my living expenses to $500/month, would you consider that house hack a liability or asset?
Excited to hear everyones thoughts!
I'd say it's more of an asset than a liability. When you move out it's 100% asset (according to the rich dad poor dad definition).
@Kevin Sobilo @Alan Asriants @Scott Trench @Conner Olsen
All excellent responses! I am glad to hear mixed answers and spark a small debate :)
My thoughts
While living there:
Liability. Whether you are living in a home with or without a renter, it is a liability. Home = liability.
The only exclusion is if you are making money while living there.
After moving out:
Asset. After you move out and turn it into a renal, then it transitions into an asset. Puts money into your pocket every month.
Part 2 of my question
You move out of the house hack but your are still negative cash flow every month. Your overall ROI is 70%+ but from a cashflow prospective, you are negative. Still a liability, right?
Example:
Note: These comments do not change the fact that house hacking is a EXTREMELY powerful tool to build long term wealth through REI
Well the house itself is considered an asset and the mortgage the liability. If owning the asset is producing a negative cash flow situation, then it's costing you money to own it (therefore in total a liability). Once you move out of the house hack, get it rented, and it's cash flowing then I would say it's an asset.
- Paul De Luca
Quote from @Ben Einspahr:
@Kevin Sobilo @Alan Asriants @Scott Trench @Conner Olsen
All excellent responses! I am glad to hear mixed answers and spark a small debate :)
My thoughts
While living there:
Liability. Whether you are living in a home with or without a renter, it is a liability. Home = liability.
The only exclusion is if you are making money while living there.
After moving out:
Asset. After you move out and turn it into a renal, then it transitions into an asset. Puts money into your pocket every month.
Part 2 of my question
You move out of the house hack but your are still negative cash flow every month. Your overall ROI is 70%+ but from a cashflow prospective, you are negative. Still a liability, right?
Example:
Note: These comments do not change the fact that house hacking is a EXTREMELY powerful tool to build long term wealth through REI
The simply theory is this: If it is taking money out of your account every month it is a liability
If it is brining in money every month, it is an asset
- Alan Asriants
- [email protected]
- 267-767-0111
@Ben Einspahr I have almost the exact same situation. 5 years ago I bought a duplex to house hack. It ended up getting paid off. Now my tenant’s rent pays the taxes, the water and sewer, and for most of the repairs and maintenance, and often at the end of the year we are able to take out a little profit while still leaving enough money available to keep running the property.
We pay for our electricity, our cable, and for the heating oil as both units share one furnace. Which is probably about $500/month.
I’d argue in this case the property is an asset because it has appreciated a LOT in value and of the bills we pay the heat and the electricity are offset by the profit we take out at the end of the year leaving our only expense the cable which is an option not a necessity.
You're going to have to pay to live anywhere, at any time. If you're house hacking, that should be able to help lower your cost of living and have someone else "help" out on those payments while you build equity in the property.
I understand the thought and technicalities of your primary residence being a liability (even though I disagree with it!) If it doesn't bring you a return or bring money in, it's a liability.
However, you have to live somewhere. Would you also not call renting a liability, even though there's no mortgage, there is a lease. Unless you live in a van down by the river, you're going to pay to live somewhere.
Since it's a househack and you're bringing in income (even if the tenant isn't paying 100% for your expenses), I'd call it an asset. Without it, you wouldn't be bringing in that additional income, and you'd likely be paying out more per month in your budget (for rent elsewhere).
I think folks try to make this black and white, but that's the beauty of real estate investing. Nothing is black and white, right or wrong. Just what you decide to do with it.
Regardless of asset vs liability, it's still a great way. to build wealth ;)
If its make $ its an asset, if it looses its a liability.
Hey Ben, after recently reading Rich Dad Poor Dad, I'm agreeing with the consensus of the other replies. I'd look at the property itself as an object that has the ability to go back and forth between an asset or liability, but the classification completely relying on if money is going into your pocket each month after mortgage/expenses are all paid.
In response to part 2 of your question...if you are still negative cash flow after moving out it would be a liability. But as long as it is in an area that isn't depreciating, I'm arguing a tenant-occupied rental unit is one of the best liabilities you could have, if not the best.
From a balance sheet and cash flow perspective it is both an asset and a liability. However, since a house hack decreases one's monthly cost of living the net affect is a higher overall monthly cash flow position (in the form of lowered cost of living) and a better balance sheet position over time (in the form of principal pay down and appreciation).
This is an amazing question