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Why Your Home Is Not A Performing Asset

March 20, 2018

I know that this is a hard pill to swallow. It was for me. In making the case that your home is not a Performing Asset, I am not going to ask you to sell your home. I am going to ask you to challenge your mindset about your home. There is a lot of emotion attached to this discussion.

Basic business accounting tells us that the purpose of an asset is to produce cash flow. The purpose of a liability is to buy an asset that produces cash flow. By that definition, your home is not an asset.

“Oh but my home is appreciating in value,” you may say. To which I ask, “Can you pay your bills with that appreciation? Can you eat it? Do you plan to retire on that appreciation? What are you DOING with that appreciation?”

Crickets…..

Appreciation is not cash flow. Even if you plan to use this appreciation by selling your house for more money than you bought it for, that is still a single transactional event. It is not cash flow. It is a potential lump sum that will be taxed and is over and done with with. Then you will have to figure out how long you can make that money last.

No. Your home does not cash flow. Your home cash sucks.

For most of us, a primary mortgage is our largest liability. It is the thing that keeps us needing regular streams of cash flow to afford. It is often the liability that we use to shape our entire lives.

Can we afford this mortgage? Then we can afford to live here and we’ll decide what else we can afford based on this mortgage. 

The problem with that line of thinking is that it means little to none of your income is going towards buying assets. Performing Assets! And when all of your income is going towards a cash-sucking liability, you are treading water at best. There is no wealth building. There is only wealth march-in-place’ing.

I recently had coffee with Tom Wheelwright, my super duper CPA, founder of Wealthability, and author of Tax-Free Wealth. We discussed this vicious cycle and he offered this simple solution:

“If you have a liability for something that does not produce cash flow, you either sell that asset or pay off the liability.”

The way I see it, we have a few options if we do not want a huge liability attached to a non-Performing Asset:

  1. Sell your home and buy something that you no longer have to finance, allowing you to buy Performing Assets with your income.
  2. Sell your home and rent something cheaper, allowing you to buy Performing Assets with your income.
  3. Accelerate your mortgage payoff so that you free up your cash in order to start to buy Performing Assets.
  4. Do nothing. Pay your mortgage for the allotted 30 years. Be no wealthier after 30 years. Do not build. Do not pass Go. Do not collect $200.

This calls for contemplation on your part. For most people, I think Option 3 is the best and most realistic choice because it means that you keep the home that you love. But I have seen plenty of investors do well with Options 1 and 2. Unfortunately the majority of people will do Option 4.

I understand that home ownership is a large part of the American Dream. We love our home. We put a lot of ourselves into our home ownership. But we will not let our primary mortgage be the number one driver of our lifestyle. We want out of this expensive liability as quickly as possible because we USE our equity to make investments all the time! We actively plan to break the mold of primary mortgage slavery and we have done it, time and again.

So here is what I challenge you to do: take a good hard look at your mortgage liability and think about how it is attached to an asset that does not perform. Think about how you can shift your cash flow in your house away from non-Performing Assets and towards Performing Assets. In conclusion, I will let author Robert Kiyosaki give you the best and crudest of reasons for this from his book Rich Dad, Poor Dad:

“The rich buy assets. The poor buy liabilities.”

Which one are you aiming for?

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Disclaimer: I am not a financial advisor. I am an autodidact of personal finance. On this blog I share with you what I have learned in hopes that you will be inspired to go your own way with your mighty money!

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