Housing loan myth: Housing loan is a good debt
Most people will have an impression that property is an asset which brings money in. Thanks to the standard accounting principles which classify all properties under non-current assets which makes most people think that properties are assets.
For example, if Brian wants to buy a property for own stay, how much money does he need? Property is an expensive item. He will most likely borrow money from the bank. Is the house loan considered as good debt or bad debt?
Many will say it is a good debt because he is using the loan to buy property which most will think that it is an investment. Property will appreciate in long term so wealth will increase over time. Since the accounting principles also recognize it as asset, many people think that it is actually bringing in money.
The sad fact is own stay house is NOT an asset but a LIABILITY. Hence, the housing loan is a bad debt. Recall again the Robert Kiyosaki’s definition of assets and liabilities. Does this property put money into Brian’s pocket? No! It takes money from Brian’s pocket!
After purchasing the property, Brian is paying for the property maintenance fees, utility bills, housing loan interest. There is no income at all. One might argue that the value of the house will increase over time which means wealth will increase too. However, will Brian sell the house for profit? If he does, is he likely to buy another more expensive property for own stay? If yes, the property is taking money out from his pocket. He would incur legal fees to discharge the property. He would then use the money received from selling the property as deposit to buy a more expensive house.
What if the property is used for renting to others? It will be different. When renting to others, Brian will receive rental income every month. If the rental received is enough to cover the loan interest, property maintenance charges and other related costs, the property is an asset. The property is putting money into Brian’s pocket – $$$$$. The best part is – is the house fully owned by Brian? Not really. Brian is taking a loan to finance the purchase of the property. During the repayment period of the housing loan, Brian gets two benefits: –
Regular income from the rental – passive income
Capital appreciation from the property – capital gain of the investment
If after 5 years, Brian chooses to sell off the property, he will pocket the difference of the selling price and the original purchase price, minus the legal costs and other related costs. It is an illusion that property is always an asset. But the truth is – it really depends! If the property is used to generate income, it will be defined as asset. If the property is taking money from your pocket, it is then a liability.
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