Your house is not an asset: The debt is an asset to the bank
A large part of a real estate professionals career is educating others. Its no different than a doctor educating a patient, or a mechanic educating a customer.
A topic that most new real estate investors have to be educated on is why their house is not an asset. And why the debt is an asset to the bank.
To put it in layman’s terms, its educating why your house is not an investment. In order to understand this, you have to understand how a house is viewed, and how the bank actually works.
ASSET VS LIABILITY
The very first thing you must understand is the difference between assets and liabilities.
In simple terms, an asset pays you. It puts money in your pocket.
A liability takes money from you. It does not pay you.
Things such as a business, a restaurant, direct oil investments. These are examples of assets. They pay you consistently.
Credit cards, student loan debt, cars. These are examples of liabilities. They take money from you.
Why do I bring up the topic of assets and liabilities? Because when the bank is underwriting you, they are underwriting their risk. They aren’t underwriting your risk.
Therefore if the note they approve you of becomes non performing, meaning you don’t pay, you become a liability on their books. If the note is performing, then the debt becomes an asset on their books.
When you buy a house and live in it as an “investment”, the money that you pay has no return.
The one who benefits from your primary residence is the bank due to the debt having a return in the form of interest.
You incur all expenses for the house such as taxes, insurance, roof expenses, electrical work, plumbing and all of the above.
These expenses have no return on money.
Even though banks are not in the “real estate business”, they are in the debt business, which means they make their money from loaned money.
To understand this, you have to understand how the bank works.
The bank runs off of a fractional reserve system. What this means is for every deposit that is made, they lend 90% in the form of loans. 10% is kept in the form of a reserve.
An easy loan for them to originate is a mortgage which is an asset to them, due to you paying interest.
While they receive payments from your mortgage, your house becomes collateral to the bank.
Not only is your house not putting money into your pocket, in case of a default, the same house you paid taxes, insurance and maintained is sold.
Which also took money from your pocket to do so.
The money you paid still has no return. Therefore it is yet to be an asset.
MONEY IN YOUR POCKET
Real estate assets that actually put money in your pocket are assets such as apartment buildings & self storage or even notes to name a few.
With apartments or storage’s for example, tenants pay down your monthly mortgage all while receiving a monthly cash flow to pocket.
Living in your primary residence as an “investment”, you pay the mortgage out of your own pocket and receive $0.00 in cash flow.
Cash flow from an income producing property can become tax free (consult your own CPA) while primary residence are hit with a capital gains tax, which in terms take more money from you.
I am not saying to not buy a house. What I am saying is that if you are looking to invest in real estate, your primary residence is not a real estate investment.
Your house doesn’t pay you, the debt pays the bank. The debt is an asset to the bank, the house and debt is a liability to you.