Many people we see talking about real estate investment and even many financial advisors tell you that invest in real estate the real asset & we believe in them and invest in real estate.
Do you think real estate is real asset?
If you are of the opinion that real estate is asset you may be wrong. Let’s understand concept of asset and liability in detail.
As per account definition asset is economic resource that is capable of being owned or controlled to produce positive cash flow.
Let’s try to make it simple anything which brings money to your pocket is asset and anything which takeout money from your pocket is liability. As you have understood difference between asset and liability let’s apply this concept to real estate with case wise approach.
Case – I – My residence is my asset
Many people still believe that residence where I live is my asset. My personal belief is your residence is not your asset. As you need your house for living you will not sale it and probably it will never put money in your pocket.
In contrast to above your residence is your liability as every month you have to pay off maintenance cost, utility cost and property tax. As it takes money out from your pocket it is liability.
Case – II – My second home purchased by Loan is my asset
Many people invest in real estate by purchasing second home on loan, if you are one of them and thinking that second home purchased by you is your asset. You are wrong.
Anything which is purchased by borrowed capital is liability. Here again it takes money out from your pocket as you need to pay EMI along with maintenance cost, utility cost and property tax.
If you are renting second home and if rent gives you income more than EMI + maintenance cost and property tax than your second home is asset.
Case – III – Second property purchased by my own money is asset
Many intelligent people will argue here that what if I purchase second property with my own money will it be asset?
My answer will be it depends for how long you own that property and what appreciation it gives. If you invest for short term and if property generates positive cash flow surpassing all cost than it is asset.
“Remember your house is not real asset but it can be real asset if it generates extraordinary positive cash flow.”
So next time if financial advisor or anybody tells you that real estate is asset remember what you read here.