Tuesday 18th June 2019
A lot of us take pride in our homes as we become emotionally attached to them. In this episode Michael discusses why your house isn't an asset, and that your house might be the biggest difference between whether or not you will be able to reach financial freedom.
Buying a house can be such an emotional decision. Too often, we forget to see the bigger picture – that this is actually going to cost money each month for a very, very long time.
Too often we’re quick to make decisions about property for emotional reasons and we don't always factor in those financial reasons. If you’re going to achieve financial independence, the type of house that you’re living in will have a major impact on that. So if you’re looking for housing or trying to get on the property ladder, or if you’re on the ladder and considering an upgrade, then try and think with your head, as well as your heart.
Most financial experts will argue that your house is, in fact, an asset, but I first discovered the controversial concept that your house isn’t an asset in the book Rich Dad, Poor Dad, by businessman and author Robert Kiyosaki.
So why isn’t your house an asset? It’s quite simply because it doesn’t make you money – it costs you money. Even if you’re mortgage free, you still have to pay property tax, and bills related to upkeep and maintenance. As a pure asset, it doesn’t generate any positive cashflow. It might be a different situation if you’re renting out a room, or rent out the whole place on Airbnb. I say ‘might’ because it depends if you’re actually making a profit from the house. Robert’s definition of an asset is that it puts money into your wallet – a liability takes money out of your pocket.
The scary thing is that we’re culturally conditioned to get on the property ladder as fast as possible, and once we’re on the ladder, to constantly upgrade your house. The truth is that the bigger your house is, the more it’s going to cost in terms of bills and furnishings. But many of us are getting ourselves into a situation where we’re getting into more and more debt, and paying for a house that we never actually own, which is something else that Robert touches on in Rich Dad, Poor Dad. The craziest thing is that many of us are so busy upgrading our house every few years, that we never actually see our mortgage through to completion!
If you remember the financial crisis of 2008, you’ll understand why your house isn’t an asset. It’s an important example to keep in mind when considering the financial implications of buying a house.
During the recession, a lot of Irish found themselves at more than 50% negative equity. Our friends were distraught about the size of their mortgage. I know people who are still so far behind on their mortgage payments that they’ve had to negotiate repayments with the bank. More than a decade later they still can’t see a time when the mortgage will be paid off.
I bought my first house, in Australia, in 2007. In hindsight, I paid way too much for it. It was financially crippling. More than half my income was going towards my mortgage, so it’s safe to say that I’ve seen the effects of mortgage stress. It felt like it took years off my life at the time.
Sometimes we forget that there are other avenues to invest your money in. Consider this: if you’re renting at the moment and thinking that property prices are a bit out of your reach, think about putting aside home ownership for the time being and start an investment portfolio. You don’t know what’s around the corner – and if prices may keep going up, or they may not. It all comes back down to your own happiness, and I can tell you from first-hand experience that signing up to 30 years of a mortgage you can’t afford is not going to make you happy in the long run.
If your housing situation isn’t ideal, there is more than one way to make it work. Whether your family is outgrowing your small home, you despise using your outdated kitchen, or you want more room outside to entertain in summer, there are more options available to you aside from the obvious, which is to move into a larger home. While this may be the easiest option, it is very rarely the most cost-effective one.
Aside from the obvious costs of moving into a larger home – that it very likely will cost more, increasing your monthly mortgage payment – we often forget about the hidden costs. As well as 1 percent stamp duty payable on the new house value, there are also huge legal costs associated with the due diligence and administration required to sell one house and purchase another.
But selling your home and buying a larger one isn’t the only option available to you. By creatively looking at the problems you have and the reasons you want to buy a bigger house, you may be able to come up with a solution that works for you.
My family was in this very position last year, after the birth of our third child. We found that we’d outgrown our three bedroom home, and after considering our options, we decided to extend our existing home. We were able to take advantage of a home renovation incentive which was available at the time to claim 13.5% of any building costs associated with an extension up to a certain limit.
If you’ve outgrown your bathroom or need some more space for the kids to play, put your thinking cap on – it may save you tens of thousands of euros.
Do my points above mean that you shouldn’t do any work on your house or never think about buying a house? No, of course not. Maybe you want to get onto the property ladder at some point, or maybe you want to renovate your house. But just think about the financial impact of it and ask yourself “is this driving me towards financial independence, or is it taking me further away?”