One phrase I hear repeatedly is: Your house is your biggest investment. This is unequivocally false! Absolutely nothing could be further from the truth. If anything, it is your largest liability.
Remember from previous posts; investments pay you. An investment generates you sufficient cash flow with a return on your investment for putting capital at risk. Does your house do any of this? If you are renting part of your house; it is probably generating you some form of supplemental cash flow, but most people are not doing this. Most people subscribe to this article from Forbes that details how to tap into the equity of the house for retirement.
Equity is not predictable. Statistically, the value of the house will, at minimum, keep pace with inflation over the long term, but remember 2008? Many who wished to retire around that time and planned to use their house as their retirement vehicle found themselves continuing to work. Housing equity, like stock appreciation is not predictable, nor reliable.
If you are purely living in your house; it is an ongoing liability, unless your mortgage is small in comparison to the value. Mortgages are expensive; and it’s something you have to pay every month. Investments pay you; you do not pay them. So when are mortgages a good thing?
Well, remember that equity is the piece of the property that you own. You take the assessed market value and subtract the mortgage balance; and the difference is what you are entitled to in the sale of the property. So, if you were to leverage a mortgage to purchase a property; and then have someone else pay the mortgage, but you keep the equity; you would be in a pretty good spot. This is why renting real estate is so popular. You get to use someone else’s money to purchase a property; you then get to have someone else pay the mortgage down; then you get to keep the equity. If you think back to my Income Pyramid; this is something definitely falls into the leveraged category.
So you have a house and now realize it’s a liability; what are you to do? Well, now that your mindset is in the right place; you are off to a good start. Do not refinance and extend the life of the mortgage; refinance to shorten the life; the sooner that monster is paid off the better. Your cash needs to work for you; you should not be working for it.
You can love your house and everything, and everyone in it. Just remember that it comes with a hefty price tag. Get your capital to work and have time on your side. The next post will be about the time value of money; which will detail out how investments change based on time horizons. So it is always better to start sooner.