With falling home prices, should your home be your greatest asset?
The wealthy often look to buy assets that produce income. These are what I call “good assets.” Not all assets produce income, but you should look for assets that have the ability to create income for you either now or in the future. Many of the middle class and poor often buy liabilities disguised as assets. Take, for example, a home. Owning a home is the dream of many Americans who consider this their greatest asset. Is a house a good asset?

Think about it. You live there, it produces no income for you, and you are required to make a payment to the bank every month. You have other expenses that go along with it: heat, electricity, water, taxes, etc. A house is often more like a liability (you have to make payments) for a long period of time before it becomes a good asset (has the ability to produce income).

Is a home a good investment?
Buying a home is often better than renting. However, one of the biggest myths is that the home you live in is your greatest asset. Even when you own it outright, it still does not produce income for you. It can become a good asset when you eventually sell. The cash you receive can then be used to purchase assets that will produce income. Be careful not to buy a home that is too large/expensive for your budget.

The better question now becomes, is a house a good investment? This is debatable. A recent study by Fidelity Investments showed that the average annual rate of return from residential real estate has been 5.9 percent per year since 1963.2 Purchasers of residential real estate typically employ leverage by financing a large portion of their purchase–and this provides a major boost to the available rate of return. As with any investment, leverage can cut both ways, increasing the potential for loss.

Is 5.9 percent a good return? Compared to the historical averages of the stock market, it is below average and more in line with the bond markets. My advice is to buy a house that you can afford and invest your excess cash into more financially lucrative investments. It is not about how much you make, it’s about how much you keep. With that in mind, remember to buy assets and not liabilities. Assets put money in your pocket. Liabilities take money out of your pocket.