The Difference Between an Asset and an Investment: Three Simple Qualifications

In a recent article titled “Sorry to burst your bubble but owning a home won’t fund your retirement,” Globe and Mail reporter, Rob Carrick takes aim at a common financial misperception.  He goes on to say, “Don’t buy into the group-think about home ownership being the key to wealth.” I couldn’t agree more and congratulate Rob on trying to provide some great advice. The only way to create personal wealth is through the purchase of income-producing assets and I think we can all agree that a personal residence provides only negative income, i.e. takes money to operate.

In my book “STOCKS for FUN and PROFIT, Adventures of an Amateur  Investor,” I go a step further and explain that a personal residence isn’t even an investment, as commonly espoused. It is an asset, like a car, but I have three simple qualifications for an investment:

• Interest paid to finance the purchase must be tax deductible. Even if financing isn’t used, it would be tax-deductible if used.
• The purchase has, or has the potential to provide a steady stream of cash flow, and
• The purchase has the potential to appreciate in value.

A personal residence only meets the third criteria, and unlike the Meatloaf song “Two out of Three Ain’t Bad,” one out of three ain’t good. Owning a home is a lifestyle, not an investment decision. Although, that house would be quite a lifestyle!

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