Home Real Estate Mortgage Is Your Home An Asset or Liability?

Is Your Home An Asset or Liability?


I have heard a lot of arguments on this subject matter – To buy or not to buy? To mortgage or not to take a mortgage? And so on and so forth.

There are two main perspectives to this argument, owning a home is an asset versus owning a home is a liability. These arguments differ because of the school of thought they are based on. Those who think that owning a home is an asset, subscribe to the accounting school of thought and those who think that owning a home is a liability, subscribe to the school of thought of investors. Before we move forward, here is a little disclaimer – This article is not intended to discourage people from buying houses — but to make them aware of the consequences.

So, let’s delve deeper into these arguments.

The Accounting Perspective

In accounting terms, a house is an asset and a mortgage is a liability. The common understanding here is that an asset is anything you own ergo appears on the asset side of your personal balance sheet. Inadvertently making a house something owned and thus has value. The accountant believes that owning your own house, builds equity as opposed to when you rent, you build someone else’s equity i.e. by renting you’re making someone else rich; by owning, you enrich yourself.

Ultimately, accountants consider their homes as assets when:

⊕ The value of your current home is higher than the next home you intend to get.

⊕ You’re getting a smaller home, in the case of retirement for instance.

Ownership Equity

Let’s take a look at an example.

Assume that John owns a house worth KES 10M with an outstanding mortgage of KES 8M, then your equity on your home is KES 2M, and of course your liability at KES 8M plus all house maintenance costs, rates and mortgages. Here is how this reflects on his balance sheet: 

John’s Balance Sheet
Asset KES (‘000) Liability KES (‘000)
Home 10,000 Mortgage 8,000
Total Liability 8,000
Equity (Net Worth)
Home Equity 2,000
Total Equity 2,000
Total Asset 10,000 Total Liability & Equity 10,000

With the above, John would consider this home an asset if he owns it 100%. He would include it in the balance sheet as equity and expense all costs that go to house maintenance. On sale, he would gain KES 10M in cash and still expense housing expenses because he still needs to find a house to live in. Therefore, either way, to him there is no ability to increase or decrease the ability to convert this asset into an income stream that can actually allow him to buy anything else other than a replacement home. 

Arguments to Own

Here, we would be looking at it as a glorified risk investment strategy that could potentially save you money or provide you with a place to live upon retirement. With that said, it would be categorized as an asset in the balance sheet because It’ll be seen as more than just an initial investment and capital costs put into it.

So, for those looking to own, your home is an asset because houses are not debts; mortgages are and owning a home invariably saves you rental money and ultimately you cannot place a marginal return on peace of mind. All in all, you still need a house to live in and owning a home removes the need to pay rent which is a recurring expense with no endpoint. The accountant’s perspective makes some sense – it may not present a short-term opportunity that many investors want, but it does make some financial sense.

Related: Ways to Turn Single-Family Homes Into a Cash Cow

The Investors Perspective

In investment terms, a home is a liability as investors look at assets as things that can generate a return on investment. Thus, if you are living in your home, as opposed to renting it out, it’s not generating any returns. In fact, investors would consider the house a money pit – maintenance costs, rates, taxes etc. This thinking, of course, differs from the true accounting definition, highlighted above.


Using the cash flow perspective of an investor:

Assume Jane, an investor, owns a house. She has two options on how she can utilize it: rent it out or use it as her primary residence. Here is how this reflects her cashflow statement would look like: 

House as an asset, used as a rental property House as a liability, used as a primary residence
Cash Inflow Cash Outflow Cash Inflow Cash Outflow
Rent Insurance

Rates & other taxes applicable

Maintenance costs

No cash inflow Insurance

Rates & other taxes applicable

Maintenance costs

Arguments to Rent

Investors look at cash flow, where anything that increases cash balance is an asset and anything that decreases it, is a liability. Therefore, the home is a liability as even when the mortgage is all paid up, you’ll still incur expenses such as maintenance, insurance and rates.

Investors are very conscious of any risks associated with their investments. They understand that owning a house and having it as a primary residence, increases risk exposure. Chief of them being inflationary risk and valuation risk, which are solely born by the investor. There is a common misconception that property values are always on the rise. But remember, even with increasing property values, benefits are only realized upon sale. Unrealized gains don’t count until they are realized, as they only remain real on paper (accountants’ perspective). This, however, does not mean that real estate is a bad investment – it just means that as a buyer, reexamine your reasons for buying before making such a huge financial commitment.

Related: Should You Invest in a Property with a Friend?

Tied Together – Example – Jane & John

Here’s an example that helps put both points of view into perspective:

Jane (who considers it a liability) thinks that because a home doesn’t earn any money, would rather rent. Thus, Jane lives in a rental home. John (who considers it an asset) understands that a home has value, even though it’s not a source of income. Therefore, John buys a home with a 15-year mortgage.

Flash forward 15 years. Jane is still paying rent, while John doesn’t pay any rent – now owns a KES 10M home. If John now chooses to move into another home of equal or lesser value, he can sell the first home and pay cash for the second house. Thus, John will never pay rent again – if he chooses. One day, Jane learns that the landlord can no longer afford to pay the mortgage and is now forced to sell the home. Jane must now move because of another person’s financial problems.

However, throughout the 10 years, Jane also bought a house on mortgage, rented it out and completed making the payments. Upon completion, she took out another mortgage, which she is still paying. Jane’s goal all along is to buy houses and rent them out for more than the liability – watching the current ratio to make sure that it isn’t slipping into its return on investment. As for Jane being at the mercy of her landlord, remember she isn’t domiciled and therefore can go anywhere and live anywhere, having a great income streaming in every month and some debt. Not too shabby, right?

Who Would You Rather Be – Jane or John?

At the end of it all, it all boils down to your values and goals. Asset or liability – sometimes it just doesn’t matter. What matters is…what do you want? If you do not want to be at the mercy of others, then buy the home.  If you would rather rent cheap and own rentals, then do so by all means. It’s all about your own values and goals. But, most importantly, do not give a flimsy reason – never put off taking a financial action that would potentially move you closer to realizing your dreams.

The Verdict

Don’t listen to the hullabaloo out there. Draw your own conclusions.

However, I bet you are wondering, which way do I way?

Primary I am an investor, with an accounting school of thought inculcated in me. However, common sense dictates that cash is everything and money in, is better than cash on paper. Therefore, to me, a house is a liability – bite me if you disagree. Talking about this makes me glittery as there are too many variables to consider. Keep in mind that an asset is anything that places money into your pocket and a liability is anything that takes money out of your pocket. Thus, a home is a liability even if you pay it off –  if you don’t pay taxes, keep it up and pay utilities, you’ll get a lien on your asset and this will make it an even bigger liability.

The world’s 1%, who own all the wealth understand this concept all too well – it is either money in or out. What we need is to look at our lives as businesses rather than looking at them as employees of our own destinies.

Image credits: Top, by Terje Sollie via Pexels

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