Your Home as An Investment

To reach financial independence you need to buy assets faster than you acculate liabilities. As the old adage goes: Assets feed you, liabilities eat you.

During the real estate boom many folks were lulled into believing that their own homes were assets. Due to the ever growing equity in homes, personal residences were considered sources for growing "wealth". In reality, whenever equity grew in a home, most people simply pulled that money out to spend on consumer goods. They splurged on the appearances of wealth while dramatically increasing their liabilities.

In reading the Wealth of Nations, Adam Smith comments on the role that housing should play:

The stock that is laid out in a house, if it is to be the dwelling-house of the proprietor, ceases from that moment to serve in the function of a capital, or to afford any revenue to its owner. A dwelling-house as such contributes nothing to the revenue of its inhabitant... (p356)

In this simplified sense we need to think of our personal residence as a liability and not an asset. It requires upkeep, maintenance, and though we enjoy living in it, it doesn't pay us monthly to live in it.

However, what if we purchase a home that is worth more than our purchase price. What if we buy a personal residence that is below market value? Could our home become a tool to help us grow our wealth? The answer to this question is absolutely yes!

Rather than squandering home equity on frivolous purchases, it can be used to acquire assets that do provide a monthly return to the owner. I followed this scenario twice. My first time was pulling out a $7,000 home equity loan on my $70K personal residence and using it to purchase an investment property worth $155K for just $120K. I used my equity to purchase more equity. This is a very effective means of acquiring more assets. Due to the low interest rates associated with loans on personal residences, the returns are greater on investments acquired with this tool. 

So, if you are thinking of investing in real estate and are starting out early in life, our first objective should be to find you a great value in the market for a personal residence. It will act as a springboard for you into other investments which will feed you and allow you purchase yet more assets in the future.