Buying your first home is always a big decision to make in life.
There are many different designs and features to pick from, not to mention size and location.
Do you want a condo, a townhome, a big lot, a small lot or no lot?
My wife and I just moved into our house last week.
It’s a modest 2400 square foot duplex.
Our decision to buy this property was based on cash flow, how I manage my money and our long-term wealth-building strategy, not emotion.
When talking about real estate, I cannot help but think about the age-old debate: Is your house an asset or a liability?
To look at this question in more detail, let’s first look at the definition of an asset and a liability.
I’ll give the simplified version:
Asset: Anything that puts money into your pocket.
Liability: Anything that withdraws money out of your pocket.
When we look at the two definitions we are looking at cash flow.
If you buy something but it costs you money every month, that is a liability.
If you buy something and it gives you cash every month, that’s an asset.
If you buy a house and after all costs, it costs you $2, 000 a month, that is a liability.
It is only an asset when you sell. Until then, it is a potential asset.
We bought a duplex so we could create some cash flow and minimize the cash draining effects of owning a home.
I would argue that even though we are creating $950 a month in rent, we still actually have a liability. Consider the numbers:
Mortgage $1, 030
Total $1, 860
This is a very conservative number as there are other costs that I didn’t even add-in.
If we are only getting $950 in rent then we still are losing $910 a month.
Is that an asset or a liability? I’ll let you decide.
How many of these properties can I own until I am broke? Probably not too many.
I would challenge you to consider buying your first home as a duplex.
That way you can minimize some of the negative cash flow.
If it is just you and your partner then you would not need the entire house anyway.
The rich own assets, not liabilities, rent out part of your house to minimize how big of a liability it is.
This is a big step toward financial freedom and how I manage my money.