|The wine, oil and syrup shelf in our kitchen.|
This topics might spark some diverse opinions .... all good. Bring it on!
Classically, an asset is something that either grows in value (realised at sale) or earns us money.....or both. Under that measure then, is the family home an asset? I would argue that it barely is. Consider these factors:
1. The interest we pay on a mortgage over 25 years is often close to the same amount as the purchase principle. Take that interest cost off any profit/earnings.
2. How much money have we spent on our homes? Add up every cent we have ever spent on our homes and detract that from the equation too.
3. If selling to realise a profit, then take stamp duty costs off any profit and also the agents fees and any upgrading/prettying-up we may have done too.
4. Unless we are going to live in a tent then another house needs to be bought so we have somewhere to live. Take that purchase price off any profits/earnings too.
5. Then there's the confusion of inflation which decreases the value of the current sale price against the initial purchase price of 25 year ago. If we bought a house in 1991 for $300K then in today's money we actually paid $541K. So many folk sell their home thinking they have made a wonderful profit when it turns out it was only inflation all along and not asset growth.
I would argue that unless we have paid cash for our home, kept it 100% zero maintenance, never upgraded it's kitchen or bathroom etc and sold it ourselves not using an agent and only bought a replacement house for less than the initial purchase price would it have been a financial asset.....a rare occurrence.
|Pudding from scratch|
Here's what the financials would normally look like:
Purchase price - $300,000
Interest on Mortgage $230,000 (5% over 25 years)
Upgrade of kitchen over 25 years - $10,000
Upgrade of bathroom over 25 years - $10,000
Maintenance over 25 years - $50,000 ($2000 per year for everything)
Stamp duty and agents fees on buying/selling - $35,000
Inflation adjustment on just the initial purchase price - $241,000.
Total cost to have owned this house from 1991 to 2017 and then sell it is $876,000. This figure is what we would have needed in our hand (net) at sale just to break even!!
Now that math was conservative. It gets worse if we upgraded our kitchen and bathroom twice in that 25 years, redecorated, recarpeted, landscaped, paid a lawn mowing person, re-fenced, paid a premium price in the first place....oh, and I forgot to factor in 25 years worth of house insurance too!
So from a purely financial perspective, is the family home a true investment asset? A resounding NO. In fact our family home could well be a financial liability.
|Dinner from scratch|
Australians are SO obsessed with buying and selling property and I hear so many conversations about it every day - and clearly nobody has done this math on the family home.
Hope that has not done our heads in too much?.......never mind. This paradigm shift will help create new thoughts, priorities and ideas.
Take care folks and stay nice