In basic financial terms, an asset is something you own and a liability is something you owe. But it’s not as simple as that – especially when it comes to property. While most property owners believe that owning your own home is an asset – an important part of growing a successful portfolio – it can also be a liability.
As it stands as a primary residence, your house might seem like an asset on the surface but a true asset is one that generates an income. If your house functions solely as a primary residence, it doesn’t qualify as an asset. If you’re paying off a bond, those payments are a financial liability – one that could go on for years and years. The same goes for a house that’s paid off – you still need to undertake regular maintenance and pay rates as you continue to live there.
What can you do to change your house from a liability into an asset?
Here are three possibilities to make sure your house is an asset
1. Don’t move too often
For many home owners, once they’ve entered the property market, they feel the need to keep ‘moving on up’ to a bigger house and a more expensive property. Unfortunately, this isn’t often the best move – the bigger or more expensive the house, the higher your bond and expenses. The result? More debt and a greater financial responsibility. This doesn’t mean you shouldn’t buy a house – just choose one that fits into your wealth plan, can be paid off, and ends up as a great investment when all is said and done.
2. Earn rental income
Turn part of your home into a rental and you will draw income into your household. Just take time to work out the finances – is the rental income you’ll be earning worth the expense and inconvenience that come with a tenant? Will it require you to make substantial changes or will it bring the more benefits than drawbacks to your lifestyle.
3. Invest in a second property
If you are able to do so without straining your finances, and are on track to pay off your primary residence, investing in the right kind of property at the right time can be a great investment. This is especially true if it’s not your primary residence. A second property can bring in rental income or add to your asset portfolio. But take care to treat it like a business and run it properly. Don’t enter into this financial commitment without the proper research and financial advice.
Property ownership is an important part of creating a diverse and prosperous portfolio, if managed correctly. Need help developing and managing your wealth management plan? Contact us. As independent financial advisers, we specialise in the finances of working professionals and in creating bespoke financial solutions to help them prosper in the long-term.