How to Turn Your Home into a Cash-Flowing Asset
There is an age-old debate about whether owning a house is considered an asset or a liability. Many will argue that because you’re building up equity in your home, it’s an asset. Yet for many real estate investors who have applied for a commercial loan will tell you that the lender regards your primary home as a liability, not an asset.
Here at EZ FI U, we subscribe to the simple definition provided by passive income guru Robert Kiyosaki: “The simple definition of an asset is something that puts money in your pocket. The simple definition of a liability is something that takes money out of your pocket.” So, according to this definition, your primary home is not typically an asset…unless it is putting money into your pocket.
This article will show you how you can do just that: turn your house into an asset instead of a liability. There are many ways that this can be accomplished, depending on your desired lifestyle, financial goals, and personal situation. Below are just a few examples of ways to generate cash flow from you primary home.
Sell Your House
This option may sound extreme, but in reality, the easiest way to flip your house from one side of the balance sheet to the other is to sell it. We understand this option might not make sense for everyone, but there are circumstances where this may actually make the most sense for your desired lifestyle and financial goals. One of our students at EZ FI University actually decided this was the case. You can read about how and why she made that decision in her guest blog article here. Of course, you’ll need to do your research about whether it makes sense financially for you to do this given the equity in your house and what you could potentially sell it for in the current market.
If you decide that selling your house makes sense for you, either because you want to travel or you can rent for a much cheaper price, or for any other number of reasons, the key here is to ensure that you don’t just spend the profits. Our advice is to take that money and invest it into an asset class that matches your lifestyle and financial goals. For instance, if you want to travel full time and don’t have interest in being a landlord, investing in passive multifamily syndications might be a good option for you where you can receive a high return on your investment without the hassle of property management.
House Hacking
If you aren’t in the market to sell for whatever reason, another option to consider is house hacking. The great part about house hacking is that there are a plethora of ways you can do this. At the heart of the concept though, it’s about renting out a part of your property to generate cash flow. You could rent out a room in your house or a mother in law suite to a long term renter, section off part of your house and do short term rentals, or even add a trailer to your property and post it on Airbnb.
If you have extra parking on your property, you may even be able to rent out a parking spot or your garage to someone. Which route you decide to go will really depend on how much time and effort you want to put into managing the rental and what part of your space you feel comfortable sharing.
If you live near a popular city where people come to visit and you can charge $130 per night on Airbnb for even just 15 nights a month, that’s almost $2,000 a month. This can cover a large portion of your mortgage, allowing you to save more money each month and in turn, invest the additional savings to help you reach financial independence faster.
Cash Out Refinance
Not into sharing your property? There are other options. If you have quite a bit of equity built up in your house because you have owned it for a while, a cash out refinance may be a path to research further. Doing a cash out refinance on your home is a way to actually pull out some of the cash that is locked up in your home in the form of equity so that you can use it for other purposes. With this approach, it is important to understand what the interest rate will be and to invest the money you pull out into an investment class that is going to get you a much higher rate of return than your interest rate. Since you still own your home in this case, you can also combine this strategy with one of the house hacking options mentioned above to drive even more cash flow out of your residence.
HELOC
A HELOC, or Home Equity Line of Credit, is a similar option to cash out refinance in the sense that it does not require you to sell or rent out part of your home. The key difference here is that you are not taking the equity out of your house but instead getting a line of credit with the equity as collateral. The other unique feature of a HELOC is that you can request the line of credit and you will not get charged interest until you actually start utilizing it. Just like with the cash out refinance strategy, you should be thinking about using the HELOC to invest in a cash flowing asset that generates a higher rate of return than your interest rate, such as a rental property or putting it into a passive multifamily deal.
If you want to dive deeper into this discussion, check out our short video that explains in further detail why this is the case from our perspective and goes into the math behind how you can actually use your house to retire early if you turn it from a liability into an asset. Remember, our goal is to help you think differently about your finances and investment decisions from what we have been taught our whole lives. There is nothing wrong with owning a home if that is a life goal of yours that you desire to feel accomplished. We are here to guide you on your path to financial independence and come up with ways that you can get there faster, and this is one of those ways.