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Is Your House Really Considered an Asset or Just a Place to Live?

Is your house an asset? Some would say yes, and I am sure that some would say it’s actually a liability. Here are different ways of thinking about your house.

Asset: Hopefully your house will appreciate in value over time, but this is not always the case. Because of the often high amount of leverage that most people take on when buying a house, the increase in value can often be multiplied. If it goes down in value and you are underwater, then your asset turns into a nightmare.

Even if your house does appreciate in value it usually does not make much of a difference. This is because most people end up selling their first house and using the proceeds, if any after considering all of the costs of selling a house, to purchase a larger house. Any equity is then “locked up” in their new house again.

No income generation: Unfortunately, your house does not generate income, unless you own a multi-family property, which is not a bad idea, but shunned by most. As a side note, a good strategy is to purchase and live in a multi-family house as your first home, stay for a number of years, move to a new home, and then rent out your unit.

Place to live: Economically, over the long-term owning a home is much better than renting, although life does seem much simpler when renting.  If you think of your home as a place to live vs. an asset than your perspective will change, including funds spent on  improvements. A cost benefit should be considered when making improvements, but know that improvements to your home are not usually the best investment.

Using it as an asset: If your home appreciates in value and your mortgage balance has steadily increased then you have the opportunity to tap into the equity of your home. Just make sure to use this equity wisely as you don’t want to find yourself unable to pay your equity loans and then end up in financial turmoil. Investments considered should be high return, low risk, which they should always be.

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Should You Buy a Home or Rent?

Several years back when the real estate market was red hot, it was almost a no-brainer to buy a home. A year or two later your home appreciated by thousands of dollars and was worth much more than you paid for it. We all know that this is not true now, so does it make sense to be a homeowner or a renter?

Let’s start with the benefits of owning a home. First, home prices are much more affordable than in the past. Combine this with historically low interest rates, and it makes home ownership much more enticing. Over time real estate does generally appreciate and over time it usually becomes one of the largest assets a person owns, especially for the middle class. Also, the interest paid on your mortgage and property taxes paid are generally tax deductible.

The drawbacks of owning a home are several. First, you must be able to afford and qualify for a mortgage. The combined mortgage and property tax payments are usually much higher than renting. Although, over time theoretically your rent will increase while your mortgage payment stays constant with hopefully only a small increase of property taxes. Also, you are responsible for all of the upkeep, improvements and repairs, utilities and all other expenses.

Renting can be beneficial for a variety of reasons. First, the payments are usually lower than a mortgage and property taxes. You do not need a large down payment, except for a security deposit. It is easier to move because you do not have to worry about selling a home and can take a job much farther than where you currently live. You also may be able to save more money because your housing costs are lower.

Renting can present a problem in the long-term though because it may prove to be more expensive over time. You also do not build any equity or have the benefit of real estate appreciation. Also, when you rent you obviously are more restricted by the rules of your landlord.

Many factors should be weighed before purchasing a home or choosing to continue renting. Home ownership is the American dream, but one thing to keep in mind is that you want to make sure that your monthly payments do not cause a financial strain. This even applies to existing homeowners.

Tax-Free Income from Your Home!

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Did you know that you can receive rental income without paying income taxes on it? Generally, if you rent your home or vacation home for less than 15 days then you do not have to include the rent as income.