Is your Home an Asset or Liability?

Majority of New Zealanders think that once they purchase a home and then pay off the mortgage, they have made it financially, they have achieved the kiwi dream and have a place to call home, a stake in the land so to speak. What homeowners also think is that they now own an asset and it is no longer a liability. This is unfortunately far from the truth and a very big mistake to think this way.

To define a real asset, it is something that is worth something and is also generating you an income. The first part is definitely true, it is worth something, as long as you purchased the property in the right area and you keep up the maintenance. The second point is the most important part, that the asset generates an income.

The problem with the second part is that majority of homes do not generate an income, unless it is a B&B, part hotel, you’re renting out a room or it has a second dwelling but still then most of the time you are declaring it as a business and its only part taxable. So most homes in New Zealand are just that, a home that doesn’t generate an income.

So in fact, your home is a liability, not an asset. Even once it has been completely paid off, you will still need to pay your council rates (around $2,000 on average), insurance, maintenance, and other property related expenses. Depending on the age of the property you will need to update carpets, curtains, heat pumps other electrical goods, concrete areas, painting and landscaping.

The property still requires an income to continue to pay for its upkeep even if you have no mortgage. So where are you going to get that extra income from, do you continue to work, or will you get that income from other income generating areas, like investment properties, cash in the bank, shares or a business?

To be honest I think a home is an asset because without a home, you can’t earn a living, you can’t have a place to settle and you can’t build a foundation for you and your family. A home is where ideas, businesses and dreams are made and without a home we all may as well be back in the dark ages living in caves!

So yes, a home is an asset, in a way, but you also need to understand that a home is also a liability. What I’m trying to say here is that don’t think that once you own a home you have made it financially, you need to purchase income producing assets so that your home also becomes part of your assets that it is paid for by your assets not by you.

If you truly want to be financial free you need to acquire income producing assets and a rental property is a great way to start. With property prices the way they are and more and more New Zealanders struggling to get on to the property ladder, you are better off renting in the area you want to live and purchase a rental property in an area you can afford that has a good rental return. Over time you will be able to use equity in the rental property to purchase a home and pay off the home sooner.

Your home is an asset and a liability, just don’t fool yourself into thinking it is just an asset, otherwise by the time it comes to retirement you will be potentially asset rich and cash poor. You don’t want to be in a position where you have to sell your home, downsize and move to somewhere you don’t want to. Remember the cost of maintaining a home gets more expensive over time not cheaper, so you actually have to earn more to keep your home in the same condition as it was 20-30 years ago.

Wealth creation isn’t just about how many assets you have, its about how much cash flow does your assets produce, because with all the assets in the world you still need cash flow to pay for them.


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