How to build assets (10) – Post Expert Advice Online

Misconception About Asset

I often face this dilemma myself. Whenever I have extra savings I get confused. I cannot decide whether to prepay my home loan or to buy a new property for rental income. When I dig deep into investing-basics, the answer becomes clear, a new property is better investment. New property is a hard asset. Moreover it also yields rental income. Investment logic asks us to accumulate assets. As assets adds money to our pocket, we should strive to buy assets instead of thinking to reduce loan burden. But there is a catch in this assumption. If a new property is yielding low returns it is not worth investing. Rental yield lower than 5% p.a. is not worth investing. The point I a trying to prove is, investors must focus on Yield generated by an asset before buying it. In yield is low, look for alternative options.

We cannot always take-for-granted a real estate as an asset. A self occupied home is not an asset. If our focus is to accumulate asset, we cannot consider a self occupied home as an asset. Self occupied property is a liability. It is not an asset as it does not add money to our pocket. Instead of adding money, it adds to the expense. It is important to note that all assets yields income. A non-income generating thing is not an asset. When we own a real estate property we often use it (as mortgage) to take loan. We can avail personal loan, education loan or even home loan. We show our existing property as security and get loan. If we would had paid say for education by selling a property, we had utilized the property as asset. But if we are just using it as security to take more loan, we are just increasing our liability. When we sell property for profit and use the fund for our use, then we are utilizing property as an asset. A non-income generating property which we do not intend to sell for profit is actually not an asset.

We live in a world of deception feeling that our property is an asset. But if our property is only helping us to accumulate more liability it cannot be an asset.

Real estate property is as asset when we earn rental yield out of it. When we buy a real estate property we shall not focus on what will be its value after say 5 years. Better is to concentrate on real returns. The real return is rental income. By focusing on rental income, we need not bother if the price of our property is going up or down. No matter whatever is the market conditions, people will continue to live in their houses and will pay rent. Buying property with best rental yields is the trick. So, self occupied house is not an asset. But a property which is earning you monthly rental is your asset.

If Net cash flow of ‘EMI paid’ and ‘Rent Earned’ is negative, then the property is not an asset