Your home is not an asset

 

By WACEKE NDUATI OMANGA
Posted  Saturday, January 26  2013 at  02:00

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Peter*, 55, came to see me early this week to enroll for our financial management program. We ended up having a conversation and he graciously allowed me to use his story for this article.

He retired six months ago and received a lump sum pension of Sh10 million (after tax). He also owns a house in Lavington now worth Sh45 million and lives there with his wife who does not work.

Peter spent the better part of the last 5 years paying off the mortgage on his house and having done that he is now completely debt free. To many people, this scenario looks pretty good doesn’t it?

He owns a fantastic house, in a high-end neighbourhood, has Sh10 million in cash and has finished educating his children. Doesn’t sound like there is anything that should be worrying Peter so why did he come to see me?

The myth of pension

He admitted that throughout his working career he really did not think of investments much and assumed pension would take care of him in his old age. He also said that once he bought his house, he relaxed.

His own parents had told him that a “home’ is the most important investment you can make. Indeed when they would visit him while he was still renting they would often ask him when he would consider buying a “proper” home.

Peer pressure also played a part as many of his friends, colleagues at his level careerwise, were buying homes in prestigious neighborhoods. This thinking was supported by the many books and articles he had read which reiterated the importance of a home as an asset.

After buying his house, he relaxed and did not think past his home. The pressure was finally off and according to him and many people around him he had ‘arrived’. Six months into retirement he realised that the lump sum of Sh10 million he had received was unlikely to cater for his expenses until he died!

Already at his current lifestyle including maintenance of his home, he had spent Sh1.2 million which is roughly Sh200,000 per month. At this rate his pension fund, even if earning interest in a deposit account would not take him past 6 years. He did not intend to die that soon!

Had Peter been advised properly about retirement planning, while he was working he would have worked towards accumulating other assets that can today be generating income of Sh200,000 per month or Sh2.4 million per year. His home is worth a lot of money but since he lives in it, it is not generating income.

He cannot also access that Sh45 million unless he sells it. An Investment does only two things – it generates income or increases in value that can be realised (capital gain).

An investment will put money into your pocket. The house Peter lives in and intends to live in for the unforeseeable future does not fit into this description. He is not generating an income from it and before our discussion had never contemplated selling it.

Options to think about

It was not funding groceries, electricity bills, transport, etc., just by choosing to call it the biggest asset. In retrospect, Peter also realised that while he was waiting to get to an income bracket where he could afford this ‘dream house’, he let go of many other actual investment opportunities in the property market.

Remember where you invest is not necessarily where you want to live. He could have bought cheaper houses elsewhere that right now would be funding his lifestyle. Peter is now evaluating between the following options:

1.Renting out the house at Sh180,000 per month which almost covers their living expenses. Renting a smaller apartment and doing part time consultancy work to generate extra income.

2.Selling the house and renting a smaller apartment for him and his wife. Sh45 million invested in government securities will give them an approximate income of Sh3.6 million a year. That’s Sh300,000 a month.

This will comfortably cater for their living expenses including the additional cost of renting. They can live off the income generated without eating into the Sh45 million.

Peter is of course human and though the second option may seem financially logical, he is still grappling with emotional attachment to the house as well as wanting to bequeath “brick and mortar” to his children.

Remember there is nothing wrong with owning a home but just don’t think of it as an Investment and even if you do buy a home, do invest aggressively beyond it otherwise you may be in Peter’s predicament.

Be open enough to realise that buying your dream home should not necessarily be the first thing you do but instead pursue other investment options that also come your way in the meantime.