Assets vs liabilities, the real definition
Do you know the real difference between assets and liabilities? Many people get assets and liabilities confused. Is a house an asset or a liability? The real answered is it depends.
An asset is anything makes you money where a liability is anything that takes your money.
What is an asset?
An asset is anything that can be used to make you money.
You can also call assets an investment if you pay money to acquire the asset.
Tangible assets are physical like a gold bar or rental property where intangible assets are assets that are not physical such as patents, trademarks or copywrites.
The difference between real and financial assets
Real assets such as property have an intrinsic value (intrinsic value is the real value of an asset without any market influence) were financial assets use the market trading price to define their value such as stocks.
A stock is a small piece of a company. When you buy a stock, you become an owner of the company. If you own a big enough amount of the company, you will gain voting rights for the company.
There are two ways to make money with stocks
- Wait for the stock price to increase and then sell the stock at a higher price.
- Get paid dividends by the company for owning a stock.
You can acquire stocks through an online stock broker such as , with you bank if they offer an investment service or directly from a company.
The goal of a property investor is to find underpriced property and add value. This can be done by redecorating, repairing or adding rooms such as a loft conversion.
After value has been added to a property, it is sold for a profit which covers the purchase price and the repairs / improvement costs. Alternatively, it could be rented out for a profit which also, covers the houses monthly expenses such as mortgage and repairs.
Real estate investment trusts (R.e.i.t) are companies you invest in and they provide all the knowledge and capital so you can invest in property. When you invest in a R.e.i.t you will trust a company to invest your money in real estate and you will receive a dividend payment.
A liability is anything that takes money from you.
A house is a liability because it takes money away from you due to its mortgage, repairs and maintenance.
You can turn liabilities into assets by finding a way to make money using them. For example, a house can be turned into an asset by renting it out so all the expenses are covered by the renter and you make a small amount of money as well. Alternatively, you sell it for more money than you paid for it which included all the maintenance repairs and small payments you put into the house.
Originally published at https://www.seanbarrett.uk on April 17, 2022.