Introduction

This question has popped up multiple times on the internet and social conversations. Is home an asset or liability? You may have also thought about this question at some point of time.

If you have read Rich Dad Poor Dad, Robert Kiyosaki mentions that an asset is something that delivers positive cash flow and hence a house is not an asset if you are living in it. If it is rented, it’s altogether a different matter. In fact, Robert Kiyosaki made most of his wealth through real estate.

However, the technical definition of ‘asset’ as understood by accounting and finance is about ownership. An asset is something tangible or intangible that you own. An asset in most cases can generate income. It becomes easy to understand when you think about a company which has assets like factories, offices, etc. For an individual, the house should be an asset as one at least has partial ownership of it (if you have taken a home loan or mortgage from a bank, they own their share of the house till you repay them).

So, how should a lay person approach this? When someone asks this question, you should understand the context or perspective of the person asking the question. Is it about Rent vs Buy or something else?

Rent vs Buy

If you go to YouTube, you would see a lot of videos telling how it does not make economic sense to buy a house and you are better off renting. The common approach is to compare the present/future value of the money outgo in either circumstance with some assumptions on interest rate, rent inflation, etc. Over the lifetime of an individual, the present value of rent paid is likely to be lower compared to money paid (including loan repayment) in buying a house. For a middle class person, this may be counterintuitive to the advice passed down by our parents and older generations that you should buy a house. So, how does one reconcile the two?

At the end of the day, this is a game of valuation. Just like not every one may agree on a single fair price of a stock on the share market, the valuation exercise depends on the assumptions made. On the very basic level, you have assumptions like lifetime or period of exercise, interest rate, downpayment, rent, rent inflation, house upgrade, maintenance, etc. But if you try and make the exercise more robust, you would have to also take into account the intangibles - flexibility of shifting closer to your office, frequent disruption to your life, constraints on how you may want to decorate your house or change functionality, whims and fancies of landlord, packing, unpacking and settling, sense of ownership and groundedness, an address to call yours, neighbours and friends, changing family dynamics, birth of kids, their requirements for own rooms, kids moving out, parents moving in, etc. You see, when you actually make the decision, a lot of such emotional and psychological factors play a role and depending on our preferences, fate and peer group, you may choose to rent or buy. Incorporating them or assigning a value to these is often very difficult.

Another interesting aspect is that parents feel if their children buy a house, they would be forced to save or put aside money from discretionary spends to the EMIs. They think of this as a forced saving wherein the children would have a roof over their head should you not be able to earn for a specific period. I think this idea of ‘forced saving’ is not a great thing to be imposed on your children. As parents, you may guide them better to understand the value of savings and investments. Today’s generation is savvy in this regard as could be seen by the growth of Demat accounts in the country.

When house could be a rewarding asset

A house could be rewarding in certain circumstances:

  • The value of the property appreciates more and you may not be able to afford living on rent in a particular area of the city
  • The location of the house provides positive externalities - good social network, helping neighbours and friends close by, good public infrastructure - nearby schools, hospitals, etc.
  • A house which is designed to your taste and preferences. One often tends to overlook the value of a customised home that exudes positivity and makes you more productive.

When buying house can make life difficult

Of course, it’s not all rosy when it comes to owning a house.

  • You still have regular expenses - maintenance and repair, property taxes, etc.
  • If you take out a loan, you have to pay EMIs for a long time. You hope to have enough cash flow servicing your debt. During COVID, a lot of people lost jobs and it became difficult to pay EMIs
  • Your office location is pretty far or you have to say no to good opportunities in other cities
  • You make poor choices. While, even renting a flat which is expensive or has issues will affect you, a bad purchase decision where the amount is huge can have much worse repercussions.

How to traverse through this

The answer to this is quite simple. What is it you are looking for? If you are looking at stability and have reasonable predictability of your career prospects, location, etc., you may go ahead and buy a house. Another consideration could be whether your parents have their own place or is there some place you could call your own if you have no money to pay rent. If your parents own a place in your hometown where you frequently visit and would not mind settling later in life, you may go about renting and living a life with flexibility of choices.

If you are someone who can’t predict where your next career move would take you or if you are not sure about a regular stream of income coming your way, you may be better off choosing to rent. If you like moving around, don’t mind packing-unpacking, have a way to deal with landlords, like making new friends, want to explore the world, etc., the choice becomes so much easier.

The decision to buy has a lot of variables - when, what configuration, which locality, budget, availability of options, etc. So, it may be wise to know if you intend to buy and accordingly have some semblance of these variables so that when you need to make the decision, you can do so with much more surefootedness.

Conclusion

So, is house a liability which requires you to just pay EMIs and take away your financial freedom or is it a liberating diligently purchased and furnished asset which allows you to work towards your dreams is a question only you can answer.