There are tons of Canadian Real Estate Websites and Articles explaining why buying your own home is a person's best investment. They claim it's an asset.
Then you turn to the baby boom generation who support this claim with comments like, "Buying my own home was the best investment I ever made." Then they make it even worse by saying, "Work hard to pay off your mortgage as fast as possible.".
Sheesh, it's enough to drive you mad. It takes a pretty tough person to go against everything the media spreads on Canadian real estate websites as accepted truths.
I think lately there are more and more of us who have enough financial education to understand that buying your own home is a great idea but it's not the holy grail it was once made out to be.
And it's definitely not an asset from my point of view.
And whenever I get into this argument with people they'll define assets in a million different ways. Here's one definition of an asset. I think a little conversation around this is important.
Let me explain with a summary of conversations we get into over here pretty regularly...
I know several people who have a financial freedom plan of "paying off their mortgage". This idea is often even encouraged by the mainstream media on Canadian real estate websites as the primary path to wealth.
So they work hard every day to do just that. Making extra payments towards their mortgage.
Now, if your goal is to pay off your mortgage then I don't think you're doing anything wrong here. You're on the right track.
BUT
If your goal is to achieve some sort of financial freedom with this plan then you may be running down the wrong path.
Why?
Well, I've never, ever, ever met anyone who has become financially "free" by paying off their mortgage as a stand-alone strategy. And that's something that is not discussed on Canadian real estate websites.
Because once your mortgage is paid off then what? If you want to live off the money in your house can you?
No, you have to invest it somewhere. And to do that intelligently you need some financial knowledge.
If the only thing you've been doing is paying off your mortgage and maybe buying the odd mutual fund unit in your self-directed RRSP you probably can't take the equity in your house and turn it into cash flow.
Why? Because you don't have the financial "know-how" and experience to do it.
You've wasted 10,15,20,25 even 40 years paying off your mortgage and now you're left with an "asset" that produces no income for you. And it's the only financial strategy you know because we're really not taught much else in school, by family, friends or on any Canadian real estate websites.
And this thing you are calling an "asset" actually costs you money.
You have to pay insurance on the house, you have utilities to pay and you have general maintenance (roof, furnace etc.).
And try not paying your property taxes. Your local government will be happy to take your "asset" off your hands if you don't cough up their money.
To us, an asset is something that pays for itself. Your house doesn't pay for itself.
Now maybe you're reading this but have an urge to scream:
"BUT HOLD ON GUYS, I'VE ALSO BEEN SAVING 10% OF MY INCOME"
Well, now we're talking! But there's a catch here too.
What have you been doing with that 10%?
And please don't tell me you've been holding it in cash. Every time I read an article on Canadian real estate websites explaining that the government has pumped another billion dollars into the economy because of a "credit crunch" I cringe.
I do not have a Ph.D. in Economics but if you are printing off new dollars and putting it into the market what happens to the value of the dollars that were already in my pocket?
Hmmm....well I guess they go down in value because there are now more dollars in circulation. Not good.
And with the value of my dollar decreasing will things like food and oil go up in price? I bet they will (as they have been).
When I "retire" will my dollars be worth more or less than today? Probably less, much less. Hmmm.
These are strange times.
So if you're "saving" 10% of your income I would ask your financial advisor his/her thoughts on this stuff. And you can start ignoring most of what you read on Canadian real estate websites.
My personal philosophy is to be an "active investor". To purchase "assets" that pay for themselves and that you directly control.
To teach myself about money, investing, cash flow and taxes so that I can decide where to put my efforts.
Let's get back to how your house is not an asset.
If the value of your house has appreciated and you're feeling pretty good about it...just remember....in order to directly benefit from that you must learn how to take that stale equity inside your house and turn it into income.
Because even if you become totally "mortgage-free", then what?
If you don't know how to turn the equity into income what exactly are you going to do with that equity?
Hand it over to a financial advisor for an annual 10% return?
10% is decent for the average Joe/Jill but it's not going to pay for trips around the world with your family. It's likely not going to be enough for very much at all. You're going to need higher returns on your money to really have "financial freedom".
I think we need to change the discussion on Canadian real estate websites from "your home is a great investment" to "what are you doing to create income streams for yourself?"
And by focusing on answers to that second question you'll move much faster towards the financial freedom you're looking for.
Now go do something about it and stop reading!
