Your home is a Liability. Here’s why..

Many people believe their home is their biggest asset. Often people gloat about how much their own home is worth over what they owe the bank, but without selling or in some way realising these profits, what does it really mean? It is for most the single biggest financial purchase they will make. So why then do I look at an owner-occupied property as a liability?

Let me introduce to you a littlething called the asset/liability quadrant. It’s a fairly simple diagram thatcan be used for almost any purchase to determine if it is an asset orliability. The two other important factors to consider are whether the purchasewill appreciate or depreciate. We need to understand thetwo:

• Appreciate – Goes UP in value over time.

• Depreciate – Goes DOWN in value over time.

We then need to distinguish the key differences between an asset and a liability.

• Asset – Pays you and income.

• Liability – Costs $$$ to hold.

We can apply the quadrant topurchases such as a new car for example which drops in value almost immediatelyafter driving off the showroom floor (Depreciates) and costs money to run,maintain, insure, etc (Liability). Therefore labelled a ‘DepreciatingLiability’.

      Goingback to our earlier example, for simplicity reasons let us assume that yourowner-occupied property goes up in value over time (we can only hope!) Usingthe same quadrant, we can start to see that although the property is appreciating there is no form of incomeand costs money to hold. The mortgage repayments, council rates, sewer charges,maintenance and insurances are all paid for using after tax dollars that cannotbe deducted. An owner-occupied property is in fact an Appreciating Liability.

Compare this to an investmentproperty that has rental income that exceeds the (tax deductible) expenses andis going up in value, then it can be seen as an Appreciating Asset.

A simple guide to achieving financial success is to rid yourself of depreciating liabilities and target appreciating assets. This quadrant is a handy tool to assist this.

- The Tattooed Investor