Oct 042014
 

Is our home an asset or liability?

The answer depends on how we define “asset.” 😉

According to the Oxford English dictionary it’s a a useful or valuable thing or person. Investopedia defines asset as a resource with economic value that an individual, corporation or country owns or controls with the expectation that it will provide future benefits. 

According to these definitions a home is definitely an asset, 🙂 not a liability.

However I’ve also heard some people say that an asset has to generate an income or be cash flow positive. According to this rule a primary residence is not an asset. But personally I think an income generating asset is simply a type of asset but not all assets have to follow that rule. Kind of like how a blueberry is blue but not all berries have to be blue, lol.

For accounting and net worth calculation purposes it’s paramount to count a home as an asset. Otherwise we would run into problems like the following.

Year 1: We have is $100,000 in savings.
Net Worth: $100,000

Year 2: We buy a $400,000 house using $100,000 as our down payment.
Net Worth: -$300,000 because of the $300K mortgage.

Year 3: We sell the house for $400,000.
Net Worth: $100,000

As we can see, the net worth progression swings wildly from one year to the next. This creates a faulty balance sheet that doesn’t represent the reality of our financial situation. However if we include the value of our home as an asset then our net worth chart will become more realistic and less volatile.

Some people don’t consider their homes to be an asset because they say you can’t spend your kitchen. However to me that simply means a house isn’t a liquid asset. But it’s still a valuable property. There are ways to unlock that value such as getting a secured line of credit or reverse mortgage. We can also rent out a bedroom, a basement suite, or a garage to generate passive income. So in a way we can spend our home, just not in a traditional sense.

14-10-garage-door-asset-or-liability-home

But one suggestion to keep track of our liquid assets is to create two separate net worth statements. One to determine our liquid net worth which only includes stocks and other liquid investments. The other to keep track of our overall net worth, including our home’s value. 🙂

In a financial context assets are regarded as having monetary value and real estate certainly fits this description.

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Random Useless Fact:

In 1999 Google asked 16 students to test out their search engine. Upon reaching the site, they sat still for 45 seconds…just staring. Google finally asked what was wrong. All 16 responded the same: they were waiting for the rest of the page to load. (Video here: skip to 10:27)

Aug 312013
 

A home equity line of credit or HELOC is a revolving credit secured by a home. It can be used to lower borrowing costs, or pay for tuition, or unexpected expenses. It can even help people invest 😎 If we’ve worked hard to build up equity in our homes then why not make that equity work for us? 😉

Benefits of having a HELOC.
Since it’s backed by a hard asset (our home) HELOC interest rates are lower than other types of loans like a traditional line of credit. This means if you have student loans, credit cards, or any other high interest debt, you can transfer the balance to a HELOC and save money on interest since most HELOC rates today are just 3.5%.  They are also very accessible because we can get HELOC money via online banking, cheques, or even ATMs.

Applying for a HELOC.
I opened up a HELOC earlier this year. I just called my bank (CIBC) and asked to speak with someone to help me get a home equity line of credit. A representative went over the options with me like if I wanted to make “interest only payments” and if I wanted insurance coverage. I’ve always opted out of any insurance for loans but that’s just my personal preference. A couple weeks later, an appraiser called and made an appointment to come assess my home, which he did the next day and took about 10 minutes. He then gave his report to my bank. After that I met with a lawyer that my bank recommended and signed some legal documents.13-08-legaldocheloc

About a week after that my HELOC was ready to go 😀13_08_helocpapers_bankacct

Continue reading »

Aug 132013
 

One of the benefits of home ownership is the ability to secure a loan against it, other than the primary mortgage. This can be done through a home equity LOC, or a second mortgage.

A few years ago I was part of the young and prudent group of people in their early twenties who bought a home in Canada when we could still amortize an insured mortgage for 35 years. I bought a $230,000 apartment with a $15,000 Down Payment which unfortunately meant I had to purchase insurance. Who at that kind of age can afford a 20% DP anyway? 😕

Most Canadian banks will let someone borrow against their property up to 80% of the market value. They call this the loan to value ratio. 80% LTV ratio gives the lender a 20% margin of safety, meaning local house prices would have to drop 20% before the bank will be at risk of losing money.

Maximum I can borrow = 80% of property value = 0.80 x $230,000 = $184,000
My mortgage balance in April 2009 = $215,000
Difference -$31,000 🙁

Since I’m already borrowing more money than what my LTV amount will allow, I can’t unlock any potential liquidity in my home 😥

Okay, now fast forward to today. By only ever paying the minimum on my mortgage payments the balance on my mortgage has barely changed. Today my mortgage balance is about $202,000. You’re probably thinking cheese-&-rice, Liquid, after 4 years you’ve only managed to pay off 6% of the initial principle? I know. It’s not very impressive :P, but that’s just how I like to roll 🙄

Earlier this year in April I blogged about how I won a farm at an auction and had to raise $25,000 to complete the downpayment by August. Luckily the purchase deadline has been pushed back until October, but I still need to come up with the money nonetheless. So back in May I decided to apply for a Home Equity Line of Credit with CIBC. The appraisal came back valuing my apartment at $280,000 🙂

Maximum I can borrow = 0.80 x $280,000 = $224,000
My mortgage balance in May 2013 ~ $203,000
Difference = $21,000 😀

Ding Ding Ding! I can get another loan 😀 The entire application process took about 5 weeks. Afterwards I saw that a new HELOC has been added to my list of Credit accounts. I haven’t used it yet but I will when I require the money.

13_08_helocpapers_bankacct

For a long term investing strategy I believe it’s much more effective to invest aggressively, especially when you’re young, rather than pay down the mortgage quickly. I could have committed an extra $200 every month towards tackling my mortgage. But that wouldn’t even add up to $10,000 over the last 4 year period, which is almost laughable compared to the property appreciation realized in the same amount of time 😉

Just imagine the massive savings effort it would take for someone to pay down an additional $50,000 off the principle on their mortgage 😯 Now imagine someone else who buys a 2nd home, waits around for several years, and also experiences a $50,000 net worth increase. Which person would you like to be 😎 ? Nobody ever gets rich by paying off their debts 😐 We get rich instead by continuing to build our asset column. This is exactly why I chose to put my savings into acquiring that farm (an asset that will generate $5,000 of income per year) instead of into the equity of my home. Continue reading »