Understanding Asset and Liability

Read? Opportunity and Outcome??? (2)

What is an asset?

An asset is something that can continuously or periodically put cash into our pocket.

What is liability?

Liability is something that can continuously or periodically take away cash from our pocket.

So is our residential home an asset or liability?

When we are still paying monthly mortgage loan on our residential home, it is a liability as it is taking away cash from our pocket. It is only when we have fully paid up our residential home; it has stopped becoming a liability but not an asset yet as it doesn't put any cash into our pocket.

This is probably the reason why the widely accepted method of computing our net worth is to exclude the value of our residential home as an asset but to include any outstanding mortgage loan as liability.

Renting out rooms from our residential home

When we rent out rooms from our fully paid residential home; it is an asset as it is putting cash into our pocket.

But when we are renting out rooms from our residential home while we are still servicing our mortgage loan; it is just reducing our liability with the net proceed from rental income. It is not an asset yet.

Propety investment gain

When we sold our residential home at profit; it is just an investment gain after net expenses and relocation costs as we will always need a roof over our head elsewhere.

Investment property

Our investment property can be an asset or liability depending on the current rental market condition.

When our rental income from investment property exceeded the monthly mortgage payment plus all expenses related to this investment property then it is an asset as it is putting cash into our pocket. But, when the rental income fails to cover the monthly mortgage payment and other related expenses it will become a liability as it is taking away cash from our pocket.

An Asset or Liability???

When we are investing, we must fully understand the concept of asset and liability. Our assets will help us to build up our wealth over time. Our liabilities may threaten or destroy us unexpectedly when we fail to manage them within our financial means during unexpected and extreme market condition.