Should You Buy A House Outright?

By: Roshawn Watson

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?

A House Is Not An Asset

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.

Should I Cash Out Stock Options To Buy The House?

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.

Other Considerations

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, financially. Additionally, there is a freedom that comes with removing debt from your life. Excluding my house, I have been debt-free for over a year, and it's been wonderful not having payments. Not owing payments removes the constraints on your cash flow, which allows you to build wealth through aggressive investing, have more fun, and give. For most people, if you paid off your home and invested an amount equivalent to a mortgage payment consistently, you could be a multi-millionaire. Financial issues aside, the lady mentioned above wants to come home to be with her kids, which is definitely worthwhile if she can swing it. A house is where you live, and you have to live somewhere. Why not own it if you can financially afford to? The key is knowing your financial situation.