The decision to park your wealth in the house is a unique investment product consideration and to gain a greater understanding of what criteria goes into that decision and the ultimate impact of such a decision, it is necessary to consider the four primary considerations of Safety, Liquidity, Return, and Tax Treatment individually.
When investing in assets, you typically want the highest possible Safety (lowest risk of losing money), the highest Liquidity (highest access, use, and control of your money), the highest Return (highest earnings on your money), and the most favorable Tax Treatment (lowest tax liability on your earnings). As you invest over time, you learn that there are gives and takes required to balance your ideal mix of Safety, Liquidity, Return, and Tax Treatment based on your current specific goals and long-term financial needs.
When we considered Safety we concluded that your wealth in the house is constantly changing in accordance with the amount of principal you pay monthly against your outstanding mortgage balance and fluctuations in the value of the house.
We identified four primary risks that could become threats to the wealth in your house: 1) Appreciation, 2) Depreciation, 3) Foreclosure, and 4) Lawsuit, and determined that the wealth in your house is no safer than any other investment whose value is determined by an external market over which we personally have no control.
Therefore, we concluded that your wealth in the house is not safe from loss, as evidenced by the numerous real estate market downturns/corrections that have happened over the last 100+ years.
When we considered Liquidity we concluded that there are only two ways to convert the wealth in the house to cash: 1) sell the house, and 2) borrow against the house. Your ability to access the wealth in your house is relative to your individual strength as a borrower. You will have to overcome the four obstacles to borrowing and you may also be limited by the appraised value and the condition of the house at the time you borrow.
Your ability to gain access to the wealth in your house when you need it most is challenged by lending guidelines that are designed to prevent access to that wealth in the event of a financial hardship that would create more risk to the lender.
The wealth in your house is much less liquid than most other investments, and various life events can cause it to become totally inaccessible. Therefore, we concluded that your wealth in the house is not liquid.
When we considered Return we concluded that wealth in the house can only change in two ways: 1) market appreciation or depreciation, and 2) wealth transfers, such as a down payment and principal reduction. There is little a homeowner can do to affect the market appreciation or depreciation of their house, but the growth of wealth in the house via wealth transfers (principal reduction) is entirely under each homeowner’s control.
Wealth in the house (house equity) is the difference between the value of your house at any given time and the balance of any outstanding liabilities attached to the house at that same time. For example, if your house is worth $350,000 and the current mortgage balance is $300,000, you have $50,000 of your wealth in the house. Therefore, we concluded that your wealth in the house earns a 0% return.
When we considered Tax Treatment of the wealth in the house we concluded that the wealth in your house potentially benefits from two types of tax treatment: 1) homestead exemption, and 2) capital gains tax exemption. The homestead exemption protects a pre-established amount of your wealth in the house from forced sale to satisfy creditors. You should verify the homestead laws in your state of residence to determine the level of protection, if any, provided for the wealth in your house. The capital gains tax exemption protects a pre-established amount of profit at the time of sale and can represent a significant tax savings.
Therefore, we concluded that your wealth in the house receives very favorable tax treatment!
Despite the fact that wealth in the house receives favorable tax treatment, it is neither safe from loss, nor liquid and accessible, and receives no return, so we believe that your house IS NOT a good place to park your wealth. You are better served with your wealth outside the house where it can be safe, accessible, receive a return, and continue to receive favorable tax treatment.
If you’re interested in learning more about the house as an investment and how owning a house can help you grow your wealth contact us to schedule a time to talk about your specific circumstances.
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