The property you live in is not an asset, even if you own it outright. That sentence flies in the face of the conventional wisdom we’re taught, that we should get on the ‘property ladder’ as soon as possible. It’s an odd quirk of culture that we’re told by our parents and mentors that we need to be financially responsible, and yet, dropping potentially millions of pounds on a single purchase after a 20 minute walkthrough is considered normal.
It's not to say that buying a house is always a bad idea. Or to say you should never do it. But if your main reason for buying a property is because you think it’s a great financial decision, we’re about to throw out a different perspective.
Before we get into the nitty gritty of property in particular, let’s clear up the concept of net worth. In broad terms, your net worth is the assets you own that you expect to
maintain or increase in value, minus your liabilities. Assets include shares, cash in the bank, precious metals, and yes, property.
Generally, things you own that you expect to go down in value (depreciate) aren’t included in your net worth. Common examples in this category are cars, boats, electronics and sports equipment such as bicycles. These items can still be super expensive, but their value is expected to fall over time. There are some exceptions, such as classic cars or collectibles, but for now we’ll keep it simple.
Liabilities are more straightforward. It’s any debt you owe, most likely to a bank or finance company but also potentially to friends or relatives.
Net worth is all well and good, but it doesn’t tell the full story. It doesn’t give any weight to how accessible or usable the money is. It doesn’t matter how many assets you have on paper, if you can’t access the money to live your life, then it’s pointless.
A better way to think of it is to split your assets into two buckets. Lifestyle assets and investable assets. Investable assets are the funds you’ve got available for growing your wealth. This could be a share portfolio, an investment property, a pension, an ISA or an overseas investment account. These are funds that you can move around, sell if you want and invest however you please.
Everything else is a lifestyle expense. That’s right, your house is not an asset. It’s an expense.
The main reason that many people consider a house an investment asset is because it goes up in value. You could buy a property for £750,000 and then a few years later it could be worth £1m. Amazing! You’ve made £250k, just like that.
But have you really?
Say you decide you want to sell the house and bank the £250,000. That’s great, but where are you going to live now? You could find another place to buy, but if your house has increased in value by that much, so have all the other houses around you. You’ll also have to pay agents fees and stamp duty, not to mention moving costs and all the hassle of actually making the move.
Unless you want to move to a worse area or a smaller property, that increase in net worth won’t change your lifestyle. Outside of being able to borrow more against the property (which you have to pay back anyway), you can’t unlock the value to make tangible improvements to your life.
It doesn’t end there. Not only does your home not provide you with usable wealth, it’s also a big drain on your pocket. You need to pay council tax, insurance, maintenance and repairs when the boiler inevitably packs. And don’t forget refurbishments every now and then as the bathroom starts to look like something out of the 1980s.
Yes. That answer might surprise you, given everything we’ve said so far. Outside of the financials, owning your own home can provide significant improvements to your quality of life. You can redecorate to your taste. You can add an extension or knock out a wall. You can put down roots in the community and send your kids to the local school without worrying about a landlord selling from underneath you.
These are all worthwhile, valuable benefits to owning a property. But they are all lifestyle benefits. Not financial benefits.
The most important point is having the right mindset around your family home. Once you understand that buying a house is a liability, not an asset, you can plan your finances accordingly.
There’s no need to rush into buying a property unless it would improve your quality of life. You can continue to rent high quality property in top locations, without having to worry about paying for maintenance or being unable to move at short notice.
If you are ready to buy, look for something that meets your needs. Don’t stretch your budget to the absolute max, thinking that it’s a good ‘investment’.
Now that we’ve established that your property cost is a lifestyle expense, we can consider a strategy that will grow your net worth and your investable assets.
Say you were considering buying a property for around £750,000, and it would be your first home. Maybe you’ve decided to stretch yourself a bit because whilst you don’t have kids now, you want an extra bedroom for the future just in case.
Firstly, you’d need to get together a 10% deposit of £75,000, plus an additional £27,500 to cover the stamp duty. All in all, that’s £102,500 in cash you need to put down for the place. If you get a mortgage for the rest, that’s going to run you around £2,850 a month.
Then you need to budget for all the outgoings on the property, plus factor in repairs, maintenance and updates over the long term. Oh, and if you ever want to move, it’s going to cost you tens of thousands of pounds and probably take you over six months.
Now instead, imagine you’re living in a great flat, in a perfect location and the rent costs £2,300 per month, because you don’t need the extra bedroom just yet. You don’t have to worry about any unexpected costs and you can up and move if you get a great job opportunity or the property just isn’t right for you anymore.
You also haven’t had to hand over £102,500 in cash.
So now, you have the opportunity to invest £102,500 plus the extra £550 a month you can save with the rent being less than the mortgage repayment. Over the next 10 years, that investment pot could grow to £275,000, assuming an annual return of 6%. Importantly, that’s liquid, usable wealth that you can then use, as opposed to paper wealth you’d gain from buying the property.
Please note that this is not a financial advice and it does not take into account individual circumstances. Please also contact a professional advisor prior to any decision making.
The value of an investment and the income from it can go down as well as up and investors may not get back the amount invested. This may be partly the result of exchange rate fluctuations in investments which have an exposure to foreign currencies. You should be aware that past performance is no guarantee of future performance.