Is a house an Asset or a Liability?

by Apr 24, 2020Wealth

This question is one that is always being asked with many different answers and outcomes. I think too many times people get hung up on terminology, what is an asset, what is a liability, do I make money on this, do I lose money on this. From what I have found, the argument of a house classified as an asset comes around appreciation. A home is purchased at X sold at Y, and the profit is Z. Therefore it has to be an asset. Right? That seems to be the question that everybody associated with and why they identify a house as an asset.   

Before we can determine if a house is an asset or not, we have to decide what an asset is?  Investopedia defines an asset as follows, “An asset is anything of value or a resource of value that can be converted into cash. Individuals, companies, and governments own assets. For a company, an asset might generate revenue, or a company might benefit in some way from owning or using the asset.” This is a broad definition in the scope of an asset because it branches out into two parts.  

The first part of the definition focuses on something of value, so a house has value, and as long as it maintains a value, any amount, by this definition, it is an asset. This part of the description means that a house is an asset. The other part of this definition focuses on revenue being generated from the investment. This definition disqualifies a home as an asset because it does not generate revenue for personal use. By this definition, a house can only be an asset because it has value, not by generating revenue. However, most Americans view real estate as an asset, the biggest asset, because it appreciates making it an asset. So does it have to grow in value to make it an asset? If not, is it a liability? If it is an asset, is it a liquid asset?     

Let’s look at what the gurus have to say  

CBS News thinks that a house is not an asset because of the upkeep cost.  Consumerism Commentary is more on the side of an asset. With so many different opinions and so many other variables, each side could have a valid argument. I could go on and on with more articles and more big names and get more opinions; however, the easiest way to determine if a house is an asset-based on appreciation alone is to do some simple math.     

Below is an Excel spreadsheet, download here for your use, you can use to help see if your house is an asset or a liability. In this spreadsheet, all you have to do is fill in column D rows 5 to 14. The information needed is the loan amount, interest rate, number payments (in years), number of payments per year (typically 12), start date, if you make any extra payments, down payment in percent, the property tax rate in percent, annual maintenance in percent and number of months lived-in home. The spreadsheet will do the work for you and calculate the rest. In column L, you will find purchase price, down payment, taxes, and maintenance (both yearly and total to date), cumulative interest, and a total for all this called Total Investment. As you can see, the largest number is generally the interest.  

Let’s take a simple example to walk you through the process. The first value, D5, is the down payment for $200,000. Next is the interest rate of 5%, the number of years for the loan’s life, which is 30. Next is the number of payments within a year; this is generally 12. The start date in this example is 5/1/2016, and if you’ve made any extra payments, the next row. The down payment in percentage format is 20%, the property tax rate is .6% in this example. Next is the amount of maintenance spent annually on the home. In this example, that is .25%. The last item to enter is the number of months lived in the house, which in this example is 48. This is just an example; all of these values can be changed to reflect your actual numbers once you download the Excel sheet.

Now let’s look at column L titled “Purchase Price, Taxes, Maintenance”, which is populated based on the information provided from column D. The purchase price is $240,000, down payment is $40,000, taxes are $1,440 per year, maintenance is $600 per year. The cumulative interest is $38,795, and the total is $286,955, which is the mortgage amount.  

In the simple example, you can see that the difference between the purchase price and the total cost to date after four short years is almost $47,000. This would be an indicator of what your selling price would need to break even on the original purchase price of $240,000 or any equity in the home. Other factors involved move the numbers back and forth a little, such as interest deductible from your taxes, but you have to wait until you file your taxes to get this money back. Closing costs and realtor fees are not included in any of these numbers and would also have to be factored in for an accurate assessment. This should give you a general feel of what it will take to break even. 

Using this information, you can now determine if your house appreciated enough to cover most expenses to say that you’ve made a real profit. If you’re able to make an actual profit, then by most American standards, this may be considered an asset. The downside of this is that all the associated costs involved with homeownership outweigh any profits made from the sale and put the homeowner into an unfavorable position. When this occurs, homeownership is not considered an asset at this point by the standard definition. 

Two final notes. Interest is weighted more at the start of a loan and diminishes over time. This is because most people do not live in their homes for 30 years, the life of most loans, they move in 8 years on average. Thus, homeowners pay mostly interest on their loads and minimal principle, which does not help their home position. Second note, appreciation values in the United States have grown and dropped to almost equal amounts from 2000 to 2010. This indicates appreciation values from nearly zero for those ten years. The same cycle is starting to repeat itself. From 2010 till the start of 2020 appreciation rates were increasing at a substantial rate, especially in the second half of the decade. Now with the Coronavirus, home prices are starting to tumble again. Let’s see if home prices balance out from 2010 to 2020 to be around net-zero, indicating a zero percentage value.  

There’s still the opportunity for the appreciation to help out in the short run. Still, over extended periods, if you bought in 2000 and sold in 2010, the appreciation gains seemed to be eventually erased due to external issues.     

Another play could make a home an asset, rental property. This is when a home is purchased for the sole purpose of renting to someone else so it is not the owner’s primary residence. This produces rental income, also known as passive income, in the hopes of making a profit. In this case, the home is an income generating asset receiving monthly rent payment. The owner would get a mortgage to buy the house expecting to have the rent exceed the mortgage payment. This does meet the definition of an asset by producing income.    

Home ownership is part of the American dream! It is not for me or anyone else to tell you to buy a house or not—many homes to appreciate producing vast amounts of home equity. This process has driven individual’s net worth up to incredible levels. My parents did this and created an excellent retirement account from longterm home ownership. They lived in the same home for 30 years, and when they sold, the cash value, they had no debt, was a once in a lifetime payout.   


If you don’t have time to take care of your health, YOU WILL make time to take care of your illness!  What side of the equation do you want to be on?

Hello, my name is David Zaepfel. I blog about things that matter to you and try to break them down into simple and easy terms so that you can understand what is really going on.  I am a firm believer that simple is the best way to go.  Don’t overly complicate things as life is complicated enough without being bombarded with over the head talk.  Keep it simple!  Let me know what you think.


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