Property Pricing in your area - gone up or down?

[videogamesrock]

Assets do cost money to maintain. For example a rental property may be rent - mortgage - repairs and management = profit. This asset generates cash flow. Your personal home or car do not generate cash flow so they are considered liabilities.

[jsd]

This asset generates cash flow. Your personal home or car do not generate cash flow so they are considered liabilities.

Theoretically your home is generating equity and can be considered an asset. Though, as we saw through the last housing bubble, this isn't guaranteed. It can turn into a liability. Add in the opportunity cost of renting as opposed to ownership in most cases, as dfrecore laid out, and you can see why most people consider it an asset. But again, nothing is guaranteed.

[videogamesrock]

Because we cannot predict the future we have to work with the facts. Your home every month generates a cost and not cash flow. We cannot rely that it will one day go up in value. When you do your monthly budget your mortgage goes under the liability column. Now the argument is a mortgage is fixed vs rent that goes up it is true. But this simply guarantees you a fixed (cheaper) liability over time. It is still an expense an therefore still a liability. Your liability will go down over time, but it's still a liability.

Lets ta look at when you sell your house. You made a $100,000 profit, well so did all of the other homes around you. Your net benefit becomes zero unless you downgrade or move to another market. Until that home generates cash flow it get categorized in your monthly budget under the liability column. Your home, car, boat unless any are rented out are liabilities.

[videogamesrock]

Here is another conversation I often have with folks from California. Do not confuse a good buy with it being an investment or an asset. For example, if you come across a home that you can buy at $100,000 and live in, it would be better to own than to rent. You liability would be $550 in mortgage payments versus a rental liability of $1,000.00.

However, if you live in California, lets say you come across buying a home for $500,000 and you rent is $2,500, then I say it is better to rent. Here is why, let your rent (liability) go toward the $500,000 house and take the $500,000 an apply it to five (5) $100,000 properties that generate $1,000 a month in cash flow for a total of $5,000 a month.

Now you figure out your assets versus liability.

Rental Properties (Assets) - Your cost of living (Liability) = Net $2,500
$5,000 - $2500

In this case, it is cheaper to rent in California, while you use that same money towards assets in other markets. Also, you are now protected against inflation as your 5 assets will go up 3% or more a year.

[jsd]

We cannot rely that it will one day go up in value.

Thanks, I just learned that all of my stocks and related investments are "liabilities"

[dfrecore]

Because we cannot predict the future we have to work with the facts. Your home every month generates a cost and not cash flow. We cannot rely that it will one day go up in value. When you do your monthly budget your mortgage goes under the liability column. Now the argument is a mortgage is fixed vs rent that goes up it is true. But this simply guarantees you a fixed (cheaper) liability over time. It is still an expense an therefore still a liability. Your liability will go down over time, but it's still a liability.

Lets ta look at when you sell your house. You made a $100,000 profit, well so did all of the other homes around you. Your net benefit becomes zero unless you downgrade or move to another market. Until that home generates cash flow it get categorized in your monthly budget under the liability column. Your home, car, boat unless any are rented out are liabilities.

'

You are confusing cash flow with assets. These are not the same thing, and can't be compared with one another. Cash flow comes FROM assets. My 401(k) does not generate cash flow for me (and won't until I'm older than 59 1/2), but it is still an asset. Cash flow is a completely separate issue from whether something is an asset or liability.

It's simple if you look at it from an accounting perspective: your mortgage loan is a liability; your home is an asset. The market value of your home minus the amount of your loan is your owners' equity (you'll notice cash flow is not part of the picture).

Here are the actual definitions of assets & liabilities:

"Accounting standards define an asset as something you own that can provide future economic benefits. Cash, inventory, accounts receivable, land, buildings, equipment -- these are all assets. Liabilities are your obligations -- either money that must be paid or services that must be performed."

In Accounting & Finance, your assets and liabilities are recorded on the balance sheet. Your cash flow is recorded on the Income Statement.

You also haven't accounted for the fact that there's no guarantee that all 4 homes were rented every single minute of each month, that the renters actually paid each month, that there were no issues (leaky roof, water heater goes out, garbage disposal breaks, or renter ruins the carpet - all things that have happened to me with rental homes in the past). With 4 homes, that means that there are 4x the risk that a problem happens. If you own 1 house, your risk is reduced.

Another fact to consider: my home has gone up more than 15% a year for the past 4 years. Now, I know it won't continue to go up that much each year going forward, but I am up a lot. If I took that same money and bought 4 $100k houses and they went up 3% a year for the same 4 years, I would have made a huge mistake. Even adding back in the difference I would have made for $1500/mo in net income, I would have lost a lot of money. If I were to sell my house now, I will have made about $330k. With the rentals, I would have made $50k in equity plus $72k in rental income difference, for a total of $122k. Obviously, I am not saying that this will happen all of the time, but it's the truth for me now.

Again, even without my facts (that are just my personal situation), your definitions are not correct. Don't conflate cash flow with assets. They are apples and oranges.

[videogamesrock]

Accounting standards define an asset as something you own that can provide future economic benefits
This is speculation/gambling. Nobody has a crystal ball that can predict the future economic benefit of your personal home.

Speculation that your home will go up value is a guess and not a guarantee. What is guaranteed are the costs associated with renting/owning a home. Your liability is the only guarantee.

If your home has gone up in value, so has your neighbors meaning you have not done anything to financially help you as you cannot do anything with the equity in that home. If you choose to sell the home and wanted to move into your neighbors home, you have not received a benefit as the cost of your neighbors home has increased by the same amount. However if you choose to leverage your home by a cash out refinance and buy investment properties with that equity, your home still remains a liability because your guaranteed debt payment are still on that home, while your investments are generating income.

For example my home is a liability. I have 100% equity in the home, but since it does not generate any cashflow it is a liability when I pay my taxes, insurance, and HOA fees. It makes me zero money. Because it costs me less money than renting, it is a lower liability than rent, but it still is a liability. It doesn't matter if the home has gone up 150% since I bought it, I am making absolutely zero off of it and cannot bank on the fact that it will be worth x amount in the future when I sell it and buy something of the exact same value within the same city/neighborhood. If my home is worth a $350k one year, then 250K the next, then 750K the following is irrelevant, I can't do anything with that equity. But what I can do is continue to pay my taxes, insurance, and HOA fees.

Diversification:
Four homes versus one home means that your investment is diversified which means your risk is spread over more assets. Diversification is safer than putting all your eggs in one basket.

The problem with your scenario is that it uses hypothetical appreciation which we cannot see, use, or touch. Income on the other hand comes in monthly and can be used as a tangible asset. I make the same argument that buying gold is not an investment. Gold like real estate is an inflationary hedge that goes up, down, sideways and provides zero income. Nobody knows but God where it is heading.

All investments are subject to risk and loss. People always need a place to live and will always pay rent, this will never go away. Rental properties are an investment because after liabilities they generate monthly cash flow, and not a speculation in the future for appreciation.


Another example, I bought an investment property in 2010. The couple that I bought it from thought that buying a home was an investment. They paid $265,000 for it with the expectation that in the future they would receive money back on this home. They wound up selling me the home for $73,000. During their entire home ownership they paid into something, gambling that it would give them extra money when they sell in the future. At this point the markets were still crashing, and I couldn't bank on the idea of the home going up in value, but what I was able to count on was that $950 a month that was going into my account as rent payments (of course there are some vacancies and repairs one must budget for).

Gambling/Speculation vs Investing

$950 in Rent * 12 months / 73,000 = .156 ROI
I can then take that cash flow and buy groceries at the store.

Buying a house for $73,000 hoping and praying it goes up is gambling.
I can't take the fugazzi equity and buy groceries at the store.

[dfrecore]

You are still talking about cash flow as if that has anything to do with whether that makes something an asset or liability. I was going by the definition; from the dictionary, generally accepted accounting principles, and the IRS. Cash flow has absolutely NOTHING to do with it. Nowhere in the definition did it say a single thing about cash flow. You are getting your accounting terms very mixed up; I'm surprised at that since you're a business major and Accounting I teaches this exact thing.

You feel free to consider your home a liability, I will consider mine an asset, and there's probably nothing more to say on it.

Take care.

[jsd]

as i've already hinted at, "not knowing the future" means that every asset is a potential liability. we all accept risk in investments and other assets, however you won't find anyone arguing that that means they aren't, fundamentally, assets. And yes, your mortgage might be a liability, but the real estate it secures isn't, regardless of the potential risk. all assets have risk. even cash-in-hand has risk.

I agree with dfrecore -- the distinction between "asset" and "cash flow" is lost on you, and a mistake I've never really seen anyone but you make.

[videogamesrock]

You are still talking about cash flow as if that has anything to do with whether that makes something an asset or liability. I was going by the definition; from the dictionary, generally accepted accounting principles, and the IRS. Cash flow has absolutely NOTHING to do with it. Nowhere in the definition did it say a single thing about cash flow. You are getting your accounting terms very mixed up; I'm surprised at that since you're a business major and Accounting I teaches this exact thing.

You feel free to consider your home a liability, I will consider mine an asset, and there's probably nothing more to say on it.

Take care.

Assets make you money, liabilities cost you money.

Read Rich Dad Poor Dad, you'll see I'm not the only one talking about this. If it costs you money, it is and always will be a liability.
My car gets me to work, I need to get to work to make money. My car is not an asset, it is a liability, its a tool I use to get to work, but it still does not make me any money. I choose to use my own car because taking a cab would be a higher form of liability. Cash is an asset, and therefore cash flow would also be an asset.

If you plan on living in the same type of place, without downgrading your standard of living, or moving somewhere completely different, then the equity in your home is irrelevant. Everybody else's equity has also gone up. This is simply inflation.

My friend bought a home in 1973. He paid $73,000 for it in Calabasas. It is now worth $1,000,000. He says to me, if I sell my home I will have made $927,000 in profit. I asked if he plans on moving into a smaller home, or moving into another part of the country. He said no because he likes where he lives and the size home that he owns. I then told him that the value of the home has grown due to the value of the neighborhood and by simply selling it and buying the same thing wont make him any richer. In fact, by selling it and buying the same type of home near by will give him zero cash zero ROI and therefore he will simply have transferred the value of his current market home into another liability.

He will have traded in his old million dollar home for a shiny new million dollar home.


Liabilities:
Housing
Food
Utilities
Children
Taxes
Insurance

Assets:
Cash
Income
Investment properties