When you start planning your financial future, let’s say around the age of 25-35, one key factor to it, is to understand the difference between the 2 crucial elements that will determine whether your plan makes sense – or whether it doesn’t. You need to understand what are assets and what are liabilities.
The idea behind it is simple. You want to invest your money in assets. And you want to reduce the amount of your liabilities. Only this way you will start creating a cash-surplus as a result from your investments.
While it may sound simple, definitions of what an asset is, and what should be categorised as a liability, can differ and very much depend on your personal point of view. One such controversial topic is an investment in a house or a condo. How would you categorise it? Is it an asset or is it a liability?
Does it create cash or costs?
The topic is so controversial, because the idea of having your own house is not only being sold as a way to save money on rent in the future ahead, but also as the ultimate guide to your personal freedom. Having your own house, you are free to do what you want, when you want and how you want it. On top of that, a house gains in value over time. Right?
Well, it’s not that easy.
First of all, let me say straight ahead that I consider a house to be a liability. My top 12 reasoning points behind it are:
- Unless rented out, a house or condo doesn’t generate cash
- If rented out, it creates additional work and responsibilities
- The potential increase in value is very dependent on many factors that you cannot control
- If not regularly taken care of, a house or condo is actually dropping in value
- Repairs & maintenance, insurance, taxes – it adds up over the years and can actually end up costing a small fortune
- Depending on the country you live in, the amount of building policies and regulations can be ridiculous and you absolutely cannot do what you want, when you want it and how you want it
- If you don’t rent it out and use it by yourself, then you are bound to the place
- If you rent it out, there are tons of legal pitfalls if you get in disputes with your tenants
- Even if it gains value over time, selling a house is not a simple and straightforward task
- A house is not creating passive income, as you need to constantly devote time, effort and money to maintain it
- Having your own house may urge you to spend more money on decorations, furniture, etc., all the things that you want to have in your house even though they are not really necessary, thus deducting your available cash for other investments
- Paying a mortgage is not investing. It’s the opposite.
I am sure that pro-house advocates can find their own reasons and counter a few of these points, but certainly not all. Also, I admit that there is some romantic sentiment to the idea of just having your own place to be and as we all know just too well, feelings and sentiments can out-weight logic on occasion.
As for my logic, it is very simple: Assets should generate cash. If an investment doesn’t generate cash, it’s not an asset.
I used to have a different point of view on this topic until I read the book “Rich Dad, Poor Dad” by Robert Kiyosaki. You can find more details on it in my “Good Reads” section. The book has quite a poor title and I don’t think that it’s particularly well written. I am also not even sure, whether the story told is true or not. But it has a few eye-openers in it, and the definition of assets and liabilities is one of them.
Assets generate cash.
Liabilities cost cash.
That’s as simple as it gets.
The Vagabond Theory
As you can see at the top and just underneath of my blog title, this blog is the beginning of a larger scheme that I will start referring to sometime in the future. The life of a modern vagabond. I have been traveling now for almost 11 years, changing cities, countries and continents every 1-2 years on average. Therefore, I have a natural desire of investing in assets that do not bind me to a place.
While my career path is certainly not a typical one, I believe that our world is developing into a, work-wise, world without the ancient boundaries of borders. Now more than ever, planning a successful career requires us to be flexible, to travel and to constantly adjust to new challenges.
In my opinion, not only is this hard to do if you devote a large part of your pay-check to a house somewhere that you think you want to live in, in let’s say about 20-30 years from now. Also, you should be prepared to expect, that this one place that you admired so much in your child- or even young adulthood, might look very different to you once you left it for a couple of years, and returned to it at some later point in the future. There are just so many great places in this world, why focus on just one so early in your life?
On top of that, there is such a thing that I call the “vagabond dilemma“. It describes the feeling that once you start traveling and the longer you travel, the harder it gets to consider settling down.
The ultimate freedom of housing
Ultimately, it comes down to your character, lifestyle and expectations. If you are devoted to a career, travel the world and are looking for the ultimate freedom, buying a house is probably not a smart move. A modern vagabond is certainly better advised to put his cash in stocks, bonds and other easily convertible and accessible assets that come with less restrictions, require less time and less attention to take care of.
Just last week, I had a thought, that to reach ultimate freedom, it would probably make even perfect sense to me to live permanently in a hotel. If you travel around Asia and plenty of places in Europe, you can easily find beautiful 4 and 5 star hotels that will cost you not more than a 100 EUR per night. This adds up to roughly 3000 EUR a month and it might sound like a lot at first, but if you really think about it: This price will include a daily, sumptuous breakfast for 2, a gym that you can mostly use 24 hours and usually also comes with a sauna and a pool. You might have access to a club lounge which you can use for working remotely and which usually also includes unlimited coffees, soft drinks, even beers, wines and often light canapé dinners. You get a housekeeping service for your room on a daily basis and, finally, you don’t need to buy anything on equipment. If anything gets broken, the hotel will fix it. Some hotels are already catering to working nomads by providing dedicated contracts with fixed rates for a specified period of time, that may offer even better rates and additional perks.
Surely, this is not something that would appeal to everyone, but it is an interesting idea and I am not dismissing it as a future perspective. If you love freedom and want independence, this is pretty much the definition of independent living. The best part of it: Your housing doesn’t consume any of your time. You have every minute of the day, every day, dedicated to only those things that you truly want to do.
If you have your own place, this is probably one of the biggest trade offs of all. There is always something that needs to be done in a house. From small things like fixing light-bulbs to larger projects like repairing showers, toilets or rooftops.
Doing your own thing
Now, there is also some positive sentiment to taking care of your own house, and let’s face it, life is not all only about money. Spending some time on a veranda or a roof and just fixing your own stuff has some positive sentiment to it and it may probably even offer some mental health benefits.
I mean, it’s probably kind of calming and relaxing knowing that you just take care of your stuff. You can feel relatively safe there, since nobody can kick you out (as long as you pay your taxes and paid back the mortgage) and if you got children, you might have some pleasure in knowing that this is something that you can leave with your kids once you’re gone. If they want it. If not, they can still sell it.
That’s also worth something.
Paying a mortgage is not investing
My last point, is also my point no. 12 in the above list. We are talking about investments, but paying a mortgage has nothing to do with investing. It’s figuratively the opposite.
Taking a loan from the bank and paying it back for a long part of your life, is not a desired target. The first years, most of your money is not even going into paying back the debt, but the largest part is going into paying back interest that is being calculated and charged in advance. So usually, the first years of paying back are not even reducing your debt.
Investments should grow and generate cash while appreciate in value. This is just not the case for most house and/or condo buyers.
Disclosure: I am not a financial advisor and these articles do not represent a recommendation for financial decisions. Please do your own due diligence and invest upon your own conclusions, considering your personal preferences and risk tolerance.