Thursday, November 11, 2004

Your Home Is A Liability

I hate to share the news with you, but your house is a liability. This month, my house has cost me more than $2,000. On the other hand, it has grown in value, at about a rate of 1.5 percent this month – that would be roughly $2,000 as well – but it’s still a liability. Let me explain.

Real estate has created a lot of wealth in this country; however, during the last refinancing boom – Americans mortgaged a large portion of that wealth because they wanted access to the equity NOW. The mortgage companies have done a great marketing job on the American public, and assisted them in lowering payments and dropping the cost of debt. However, Americans are still in debt at record levels and we still haven’t learned to save. Many of us have been relying on the growth in the value of our homes to create wealth. If that’s your only savings plan, you’re in for a big, ugly surprise. More on that in a moment.

This “investment” that we live in, is actually a liability. I just paid my mortgage payment; repair bill for some drywall work; fixed the sink and leaking toilet; paid the water and trash pickup bills; and sitting in front me are the phone and electricity bills. By the end of the month, I’ll put out $2,523 – just so I can sleep here, clean up the yard, wash the windows, winterize the doors and windows and shout at my teenagers under a non-leaking, warm dwelling.

Does this expense mean I should move out and stop the madness? Not at all. To rent in this same house in my marketplace, would cost me about $400 more per month (which is the going rental rate for my house.) And therein lies the difference between my house being a liability versus an asset. While it has value, it’s not creating income for me. It’s creating wealth, but the only way I can gain access to it is to go deeper into debt or sell it (something none of my kids or wife would agree to right now…but give me one bad weekend and it may be RV land for all of us.)

There are two houses around the corner on the market for rent. The owners of those properties have income-producing assets, in addition to the wealth being created via appreciation at nearly 20 percent per year over the past two years. (The national average stands at 7.7 percent appreciation, according to the National Association of Realtors.)

On top of that, the mortgage expense of the property, hopefully, is being covered by the rental payments, and thus, the owner doesn’t even have the monthly mortgage payment to contend with. And since the renter will pay for garbage, lawn maintenance and all utilities, the owner needs to be concerned only with breakdowns of appliances, hot water heater, a/c and other functions of the house. A rental property is truly an investment and money-making asset.

Now, back to the savings. Your home, in a liberal sense, could be considered a forced savings account. In my marketplace, Washington, DC, it’s definitely making money for everyone. However, some markets are still headed downward and you must determine what role the value of your home plays in your overall financial plan.

It cannot be denied that if the house is growing in value, it can create some wealth for future use. However, the reality remains that we as a country are not saving enough.
A recent AARP study found that less than half of baby boomers save for retirement regularly. According to the 2002 Retirement Confidence Survey, 44 percent of retirees age 60 and older have saved $75,000 or less for their retirement and 11 percent have saved nothing.

Your home should not be used as the substitute retirement plan. Practice the GOOD principle (Get Out Of Debt) and then use your payments to your creditors as investments in your future.

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