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.
Other Considerations
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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.
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.
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
@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.
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.