Sunday, June 19, 2016

Home Sweet Home - Assets and Liabilities




Empty homes in Detroit (Michigan, USA)


What is an asset?

Broadly speaking, an asset is something that is valuable: that is something for which somebody is paying you money or would be willing to give you money to use it or to purchase it.

An example to make things clearer.

If you have a house given for rent, then this house is an asset: the tennant is paying you a rent. Thanks to his monthly payments, you can reimburse the mortgage you are paying on the house, the government taxes on the house, the local taxes, the condominium extraordinary expenses, the extraordinary maintenance expenses. Plus you may have extra bucks left in your pocket. On that amount, you have to pay an income tax. All these expenses are called liabilities.

The house is also an asset because, if you decide to sell it, somebody would pay you something.

Now, let's suppose you cannot find anybody to rent the house to. All the previous taxes rely entirely on you. The house is no longer an asset. It has become only a liability, something that sucks out the money from your bank account.

Well, you may decide to sell the house to get rid of it. Maybe it is a hard decision, you inherited the house from your parents. Of course, you have to find somebody interested in the purchase.
If there is nobody, you have to drop the price. Down to a point where the residual mortgage cannot be even backed up by the amount of money you get from the buyer: you sell the house, but you still owe money to the bank. This is something that happened in the USA and the Netherlands in 2008-2009. USA are in America, the Netherlands are in Europe. Very far away, different currencies, different cultures, different languages, still the same fate due to common causes.

So, an asset is something that gives you money.
A liability is something that sucks your money away.

A house can be either an asset, or a liability. It depends on several factors, but the key point is simple: you have to find somedoby willing to pay you a rent or to purchase it.

This seems trivial. Straightforward. Nevertheless, many people do not think about this when they go to a bank and ask for a mortgage.

First rule in ExitEconomics: the value of something you own is not what you think it is, it is the value that the rest of the world is willing to pay for it now.

This applies to real estate, to cars, to the training courses you attend to improve your skills to seek for a job, to EVERYTHING.

When I decide to invest my time and resources on something important on a long run, I have learned to always ask myself this question: how much does the rest of the world (that is excluding myself) value what I am about to do? In other terms, I am willing to spend NOW money, that is to accept a liability, for an investment that will turn to be a long term asset in the future. If the asset is not good for the rest of the world, it will not cover the liabilites that I have made.

Post scriptum: be aware that for the government the house is always an asset on which you have to pay taxes, even if you are losing money on it. So, they claim it is an asset for you, but the reality is ...well, the reality is that the house is always an asset for the government since they can tax whatever they want on a real estate property, especially when they are short of money.
A very recent example:  Italian Prime Minister, Mr. Monti, increased property taxes by a whopping 143.5% in Italy from 2011 to 2014. Those unlucky italians who believed that the brick is sacred, that is resilient to crisis and political changes, had to reject this belief almost overnight!


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