OK... before you get all upset and financial on me, yes, from an accounting perspective, your house is considered to be an asset. I even put my house down as an asset when I calculated my own net worth. However, hear me out. Your house is not an asset, but more of a liability. Here is why:
- When you take out a mortgage to buy a house, you already incur a huge liability from the mortgage itself with accumulated interest. In case you didn't know, a $200,000 mortgage, with a 25 years amortization period at 2.35%, will cost you $65,689 in interest. That's assuming the interest rate stays low. That's why it's always a good idea to make extra payments or increase your payments whenever possible.
- You property tax usually costs around 1% of your property value.
- Over the life time of your house, you'll need to perform various repairs and maintenance that will cost you $$$ out of the blue.
- The most important point is that your house will NEVER generate value, unless you rent out the basement or sell it when the market is doing well. Even if you sell your property, you'll still need a place to live.
Joe 1 ($1 Million)
House - 25%
Stock - 25%
Bond - 25%
Other Investment - 25%
Joe 2 ($1 Million)
House - 80%
Stock/Bond/Other Investment - 20%
Joe 1 has 75% of his assets providing an annual return, while Joe 2 has only 20%. Lets say that they all give a 10% return just for simplicity. Joe 1 will get $75,000/year and Joe 2 will only get $20,000/year. Keep in mind that these assets will continue to provide annual return even after retirement. Also, Joe 2 probably paid way more than Joe 1 on interest for his mortgage just because he purchased a beautiful $800,000 house.
Just because you can afford a bigger house doesn't mean you should. Putting all your eggs in one basket is never a good idea. If you are still not convince then go search "house is not an asset" on Google.