Should You Buy A House Outright?
| August 26, 2009 | Posted by Roshawn Watson under Uncategorized |
Anyone who subscribes to the Rich Dad, Poor Dad philosophy believes that a house is not an asset. Still, so many people tout the belief that “home ownership is one of the best ways for the middle-class to build long-term wealth.” Clearly, for some this is true. However, suppose you find yourself in the somewhat unique predicament of having the resources to purchase your house outright without a mortgage. Is it then financially-wise to make the purchase?
Before tackling that question, let’s give it the appropriate context by revisiting why some believe that a house is not an asset. The reason some argue that a house is not an asset, at least for the “homeowner,” is because home ownership increases financial liability. Consider the balance sheet for a typical homeowner. The value of the house goes in the asset column while the mortgage value goes into the liability column. Thus, for most people, the house is a financial liability, at least until the property-owners sell it. Once sold, the homeowners can access the equity (asset). The real benefactors of home ownership are the mortgage lenders: our liabilities (mortgages) serve as their assets. If one owns the house outright, this eliminates the monthly financial obligations, but home ownership still costs money. Taxes, home maintenance expenditures, and home owners associations dues (if applicable) can still make home-ownership a financial burden. Thus, there are some proponents who believe that even a home with a paid-off mortgage is not a true asset.
I recently came across a scenario where someone had accumulated stock options at work over several years and was considering cashing half of them in to use the proceeds to buy a house outright. She wanted to stay at home with the kids, and without a mortgage, her family could survive on solely her husband’s income. Still, the concern was whether this was in their best financial interests.
At the core of the above scenario lies the question “should I cash-out an asset (stock options) to purchase a non-asset (a house)?” I truly believe the best answer is it depends on your unique financial situation. For example, before purchasing the home and decreasing one’s income (quitting a job), it is important to have a strong financial foundation. This would include being debt-free and having an emergency fund at the minimum. Even on a single income, they should be able to invest at least 15% of their income and contribute to their kids colleges funds, both of which could be feasible if they were debt-free. The answer also depends on their age. I’m assuming that they are young because they have young children (although you definitely cannot be certain). If they are older, it gets a little trickier. It is always sad when someone has to sell her home because she doesn’t have the appropriate amount in investments for retirement. If you become house poor because too much of your cash is tied up in your primary residence and you want to retire soon, you could end up selling the house to eat.
Also, it depends on your investment strategy. I am NOT a fan of stock options in individual companies. It is far too risky for me to not have diversification. Enron, Lehman Brothers, and countless other company failures have proven the principle repeatedly. Thus, I would sell the stock options anyway. Lastly, it may depend on how long you plan on living at the residence. Although real estate is showing signs of recovery, who knows how long it may take your area to recover. The good news is that low real estate prices can still be found, which means you may find some good deals on property. However, it may still take a while for the value of your house to go up significantly, so it would be best to at least plan on staying there for 5-7 years.
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Of course a house is an asset. There are many tangible assets that also require some outlay of money for upkeep, repairs or maintenance.I've owned my house for 14 years and have about 70% equity in it. Just becus the mortgage isn't completely paid off doesn't mean i don't have any equity in it. It may not be immediately liquid, but assets are not defined by whether they're liquid or illiquid.the tax deduction alone is hardly a good enough reason to buy a house.
Hello,I think you are missing their point. Let me clarify a little. I think everyone realizes that the house is traditionally considered an asset. This is basic accounting. However, some people have a different definition for assets: assets are items which bring income/financial wealth to you. In this case, a house is not an asset because it brings no income. In fact, it requires your income to maintain. In the long-term many people definitely end up ahead because they build equity (asset), but that doesn't mean that it was the best financial decision. For example, if that money were invested in a business or even into a good ETF, would your ROI be better? It is quite possible.The truth is that for most people, the home is their biggest investment, and that is precisely their problem.Let me say that I definitely get your point about liquidity.Cheerful Regards
Look I just lost my job 10 months ago. But I had enough savings and severence pay that I managed to buy a home outright last April. It was the best decision I ever made. I now have a part time job(20 hrs a week) which brings in $1500 a month, which is more than what I need to cover my living expenses, taxes, insurance and repairs. nothing beats owning a home outright. You live within your means and stay out of debt, and you are on easy street.
Look I just lost my job 10 months ago. But I had enough savings and severence pay that I managed to buy a home outright last April. It was the best decision I ever made. I now have a part time job(20 hrs a week) which brings in $1500 a month, which is more than what I need to cover my living expenses, taxes, insurance and repairs. nothing beats owning a home outright. You live within your means and stay out of debt, and you are on easy street.
I totally agree with you on this one, Shawn. A house is not a asset. The belief that your home is an asset started with the thought that housing values appreciate with time. For example, a home you purchased for $100K might be worth $200K 15 years from now. Well, sure you've gained equity…but ONLY if you sell it. However, we've all seen the bubble burst, housing prices fall, and millions owe more on their homes than their worth. We've seen people who bought homes 25 yrs ago @ 200K, sell them $400K after paying $600K on a 25 yr fixed mortgage. Major loss!Homes are a liability. Think of all the things you have to pay for with regards to home ownership:property taxes, homeowners insurance, furniture, routine upkeep and maintenance, landscaping. Just consider them what they are: a place to keep you warm, safe, and dry.
I totally agree with you on this one, Shawn. A house is not a asset. The belief that your home is an asset started with the thought that housing values appreciate with time. For example, a home you purchased for $100K might be worth $200K 15 years from now. Well, sure you've gained equity…but ONLY if you sell it. However, we've all seen the bubble burst, housing prices fall, and millions owe more on their homes than their worth. We've seen people who bought homes 25 yrs ago @ 200K, sell them $400K after paying $600K on a 25 yr fixed mortgage. Major loss! Homes are a liability. Think of all the things you have to pay for with regards to home ownership: property taxes, homeowners insurance, furniture, routine upkeep and maintenance, landscaping. Just consider them what they are: a place to keep you warm, safe, and dry.
Your equity is your business, your house is a place for you to live. Don't mix the two up… but definitely buy a house if you want a place to live.
I have on three occasions in my life owned houses outright. Let me tell you it feels great when you pay the last mortgage payment. It may not allow you to optimize your investments but it has allowed me to prosper. One method that has worked for my father and myself was to buy in on less expensive houses in places that you wanted to live long term. It pays off in the long run.
I have on three occasions in my life owned houses outright. Let me tell you it feels great when you pay the last mortgage payment. It may not allow you to optimize your investments but it has allowed me to prosper. One method that has worked for my father and myself was to buy in on less expensive houses in places that you wanted to live long term. It pays off in the long run.
Your equity is your business, your house is a place for you to live. Don’t mix the two up… but definitely buy a house if you want a place to live.
Of course a house is an asset and anyone who says it isn't is misinformed. Specifically, it's a "real asset", which can have some big advantages over fiancial assets. There are also some big disadvantages, such as maintenance and liquidity.As you stated correctly, the mortgage is the liability and that's what causes trouble in people's finances. Any form of debt can increase stress and risk, especially a big debt. Without a mortgage, someone is very unlikely to lose their home during a crisis.I agree with MaxCactus. Owning a house outright is a great fiancial position to be in and that is my goal in a couple of years. My folks own three houses free and clear. They live in one and collect rents from the other two. They aren't as worried about the stock market or Social Security.People who rent forever or never pay off their mortgage are going to be in a real bind when they try to retire. Inflation will be working against them and their housing costs will skyrocket right as their income drops.
Of course a house is an asset and anyone who says it isn't is misinformed. Specifically, it's a "real asset", which can have some big advantages over fiancial assets. There are also some big disadvantages, such as maintenance and liquidity. As you stated correctly, the mortgage is the liability and that's what causes trouble in people's finances. Any form of debt can increase stress and risk, especially a big debt. Without a mortgage, someone is very unlikely to lose their home during a crisis. I agree with MaxCactus. Owning a house outright is a great fiancial position to be in and that is my goal in a couple of years. My folks own three houses free and clear. They live in one and collect rents from the other two. They aren't as worried about the stock market or Social Security. People who rent forever or never pay off their mortgage are going to be in a real bind when they try to retire. Inflation will be working against them and their housing costs will skyrocket right
well I'm not sure if i'm Miss-informed Bret.. But i'm also not sure it's an asset?
Let's see.. I purchase a $200k home.. I put $40k down (20%) . so tech you feel you now have 20% Equity in the home?
I guess it's on how you see things? You see instantly you have $40k in equity.. I see i'm in debt $160k.. but as the commerical says. BUT WAIT.. THEIRS MORE ….
Okay let's take a look at this " ASSET " you own .. let's break it down shall we.
You owe $160k . Mortgage with taxes etc. comes out to $1170.00 (that's at 4.5% interest ) Plus taxes ( say $300 a month ) . this will very greatly depending on where in the country you purchase that home. ) but let's just use avg's for now.
So Homeowners Insurance $67.00 A MONTH .(course that will probably go up over the years ALONG with your taxes)
SO .. in 30 Years for your loan . You have paid 1170 + 300 (which will go up) + Insurance (which will also go up ).
but for now. you pay total of interest and payments over 30 years $421,302 Taxes Fee's and INsurance $132,000
That means that $200K home that's an asset to you just cost you after 30 years $553,302
Now HOW is that an asset?
I haven't even HIT you with ALL the HOME expenses? such as a NEW roof and Furnace that will be needed before 30 years. and the MAJOR remodeling you will need to do if you plan on selling your 30 year old outdated home IF IT WAS BRAND NEW when you purchased it? lawn mowers.. snow blowers.. Water Bill.. Sew Bill.. I mean seriously folks. HOW the hell is it a profit to own a home that cost you WAY more than you will get out of it?
ONLY WAYS to beat that system.. SIMPLE..
Pay $200k for the house. Pay your Taxes and insurance over 30 years of $132,000
Now if you sell the Home. you have to sell it for MUCH more than $332k to break even.. which is very easy to do after 30 years. I'd suspect you could walk away with a profit of $100k or MORE.. figuring in water bills . .lawn care.. etc.. you would come out ahead. getting a mortgage NOT even CLOSE.. even if you take off the $2500 a year in taxes that you would get you still lose! ALL that money would be what you ended up putting back into your home to keep it up to date.
Just my opinion folks..
@Bret@AnonymousI definitely agree that owning a house outright can put you in a financially elite position if you are smart with he rest of your money.Additionally, I think that home ownership, as long as the purchase is conservative, is a good financial decision.I am still concerned about those who are not smart with their remaining income and those who are not conservative in their purchases.I always say if your home is your largest investment, that is part of the problem.
Of course a house is an asset. There are many tangible assets that also require some outlay of money for upkeep, repairs or maintenance. I've owned my house for 14 years and have about 70% equity in it. Just becus the mortgage isn't completely paid off doesn't mean i don't have any equity in it. It may not be immediately liquid, but assets are not defined by whether they're liquid or illiquid. the tax deduction alone is hardly a good enough reason to buy a house.
Well ..you haven't actually OWNED your house for 14 years .. If you ONLY have 70% equity than you don't OWN the home. when you own 100% equity YOU THAN will OWN your home..
I know you feel you own it. but please don't take it away from those who actually OWN there homes !!! and have paid them off 100% and OWN there homes..
That's my opinion as well. Thanks for sharing.
Hi Shawn, This is a tough one, which I think about a lot. How I have resolved the issue for our family is, take out a low interest mortgage,then regularly invest in assets likely to return a larger percentage than the interest on your mortgage. ie over the long term, stocks have returned in the 9% range, and you can get a mortgage today in the 5% range. Of course, I have the discipline to save regularly and avoid credit card debt. This strategy isn't for all! Best regards, Barb
Hi Shawn, This is a tough one, which I think about a lot. How I have resolved the issue for our family is, take out a low interest mortgage,then regularly invest in assets likely to return a larger percentage than the interest on your mortgage. ie over the long term, stocks have returned in the 9% range, and you can get a mortgage today in the 5% range. Of course, I have the discipline to save regularly and avoid credit card debt. This strategy isn’t for all! Best regards, Barb
Barb, I certainly get where you are coming from. So few people systematically invest without ever wavering like you and your husband habitually do. Sometimes, taxes and risk sometimes erode the spread, but like you said this strategy isn't for all. Thanks so much for the comment.Regards,Shawn
"Should I Cash Out Stock Options To Buy The House?"This reminded me of a good friend of mine who, during the stock market boom became a 'paper millionaire'.He decided to buy a house and one option was to sell his stocks and pay for it. He debated quite a bit and finally listened to his wife and liquidated a part of his stocks for the house.Soon after the market crashed. Boy was he glad! In his case the decision turned out to be right and the timing, impeccable.
"Should I Cash Out Stock Options To Buy The House?" This reminded me of a good friend of mine who, during the stock market boom became a 'paper millionaire'. He decided to buy a house and one option was to sell his stocks and pay for it. He debated quite a bit and finally listened to his wife and liquidated a part of his stocks for the house. Soon after the market crashed. Boy was he glad! In his case the decision turned out to be right and the timing, impeccable.
My recent post If you are happy with your Big Bank, should you still switch to a Credit Union?
I bet your friend was glad. That's why it doesn't always pay to only look at nominal values. Sometimes that inward peace nudging you towards being conservative and financial security (owning a debt free home) is what is necessary to become and keep you wealthy.
When you leverage, you inherit risk. Sometimes the value placed on piece of mind via a paid for home can out-yield that of a low interest leveraged home coupled with other high yielding investments. Overall, great discussion and key points.
At the core of the above scenario lies the question "should I cash-out an asset (stock options) to purchase a non-asset (a house)?" I truly believe the best answer is it depends on your unique financial situation
At the core of the above scenario lies the question "should I cash-out an asset (stock options) to purchase a non-asset (a house)?" I truly believe the best answer is it depends on your unique financial situation.
At the core of the above scenario lies the question "should I cash-out an asset (stock options) to purchase a non-asset (a house)?" I truly believe the best answer is it depends on your unique financial situation
I'm concerned that you talk about the "non-asset" of home ownership without touching on the cost of having to rent some type of shelter. Certainly, if I purchase a home at $50K and am able to sell this 5 years later @ $100K, not only was the home an asset, but an "appreciated" shelter to boot.
Response?
@Anonymous I definitely agree that owning a house outright can put you in a financially elite position if you are smart with he rest of your money. Additionally, I think that home ownership, as long as the purchase is conservative, is a good financial decision. I am still concerned about those who are not smart with their remaining income and those who are not conservative in their purchases. I always say if your home is your largest investment, that is part of the problem.
@Bret I definitely agree that owning a house outright can put you in a financially elite position if you are smart with he rest of your money. Additionally, I think that home ownership, as long as the purchase is conservative, is a good financial decision. I am still concerned about those who are not smart with their remaining income and those who are not conservative in their purchases. I always say if your home is your largest investment, that is part of the problem.
Hello, I think you are missing their point. Let me clarify a little. I think everyone realizes that the house is traditionally considered an asset. This is basic accounting. However, some people have a different definition for assets: assets are items which bring income/financial wealth to you. In this case, a house is not an asset because it brings no income. In fact, it requires your income to maintain. In the long-term many people definitely end up ahead because they build equity (asset), but that doesn't mean that it was the best financial decision. For example, if that money were invested in a business or even into a good ETF, would your ROI be better? It is quite possible. The truth is that for most people, the home is their biggest investment, and that is precisely their problem. Let me say that I definitely get your point about liquidity. Cheerful Regards
Barb, I certainly get where you are coming from. So few people systematically invest without ever wavering like you and your husband habitually do. Sometimes, taxes and risk sometimes erode the spread, but like you said this strategy isn't for all. Thanks so much for the comment. Regards, Shawn
I bet your friend was glad. That's why it doesn't always pay to only look at nominal values. Sometimes that inward peace nudging you towards being conservative and financial security (owning a debt free home) is what is necessary to become and keep you wealthy.
completely confused about real estate, so hopefully someone can give me an easy to understand approach.
i have over the years acquired enough to by a house outright, however i am a little confused as to how this all works.
if i was to purchase a house outright, do i still have to pay a mortgage? what other payments besides the obvious living expenses like electricity and gas etc, would i have to pay for? someone i spoke to mentioned something about land rates and all that but i really dont know.
Hi Emily,
If you can purchase the house outright, you should not need a mortgage. You would likely have to pay property taxes, maintenance costs, closing costs (unless you negotiate that the seller pays these for you when you purchase), and home owner association fees (if applicable to your community), title insurance (when you purchase), and home inspection fee (prior to closing the deal; almost always recommended that you get the property inspected). You may also have a budget for repairs, depending on the shape the house is in.
Some argue that they like mortgages for the tax benefits, but I wonder about their math. To keep a mortgage for the tax benefit is like saying that you are willing to pay the bank $10,000 per year to avoid paying the IRS $2500. It just doesn’t add up in your favor.
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One of the advantages for the house, he adds, are substantially lower labour (dealer) costs, which can recover the price of a machine, often within 90 days.
Homes are a liability. Think of all the things you have to pay for with regards to home ownership:
property taxes, homeowners insurance, furniture, routine upkeep and maintenance, landscaping
Real estate, like all free markets, moves in cycles … it just moves a lot slower than commodities, stocks, bonds and many other types of investments
The belief that your home is an asset started with the thought that housing values appreciate with time
The real benefactors of home ownership are the mortgage lenders: our liabilities (mortgages) serve as their assets. If one owns the house outright, this eliminates the monthly financial obligations, but home ownership still costs money icon brickell rentals