Real Estate typically refers to properties on a piece of land which includes the air above it and the ground below. The word itself was made from a combination of Latin heritage words as estate refers to the land. People own real estate which makes it harder to classify it as a liability or an asset. To be able to make out the difference, you need to know what the two terms mean. An asset is anything belonging to an individual or organization that is of value whilst a liability is anything that makes you pay money to another person for example, debt. With this basic foundation, making out if the real estate they own is a liability or an asset could be easy.
The simplest way to do that is by understanding what assets and liabilities do. They may both be properties, but have a certain line that distinguishes them one from the other. In general an asset can make money while a liability feeds on your money. That is the first clear-cut distinction between a liability and an asset. Real estate can be an asset otherwise a liability relying on some underlying elements and way of approach.
When buying real estate, it is important to have some basic understanding on buying or selling real estate. You must look at the value of the real estate, its price is influenced by its value. The value of real estate is dependent on factors like location, neighborhood together with the age and quality that it has. Once a clear understanding is achieved on real estate, look at the financing for your real estate. This is where classification of whether a property is a liability or an asset first starts. Which financing method you choose to use will classify the nature of your property by highlighting the different aspects that make a property an asset or otherwise a liability.
If you choose to pay cash for the real estate, it might be classified in the middle, the rest will be left to what is done with your estate after purchasing it. When you decide to rent out your property, and succeeding, monthly rent starts coming in. This property of yours is clearly an asset because it makes you money. Considering the fact that this estate was bought in cash, you have no monthly deductions except maintenance and some government taxes at intervals. Such a piece of real estate qualifies to be an asset.
Another option of acquiring real estate is by use of a mortgage loan. When an estate is financed by a mortgage, it is likely to be a liability if you choose to occupy it yourself. Monthly payments in this case have to come from you to settle the loan. Classification of the estate will make the liability list because the owner pays monthly mortgage payments. Mortgage debt can eventually be written off but such a method takes longer. But even when financing on real estate is done with a mortgage, there is still a way to eventually turn it into an asset and possibly give you a bit of cash.
This method of renting out works for real estate acquired by either a loan or cash payment. Renting out the estate will mean the monthly loan payments will be paid by the tenants. And while it’s high value, in a good neighborhood, the rent could be enough to give you extra cash at the month’s end. Another alternative is to flip properties, though this one works best for those trying to make business out of real estate. It follows the same principle: your profit is the surplus gained after the sale or regular rent payments. This is also a good way of raising the worth of real estate.
Distinguishing between an asset or liability is a fundamental step in making an evaluation of real estate being an asset and a liability. An asset should add worth, while a liability does the opposite as it feeds on your money. Owning real estate can be either of the two depending on how one plays the game. Real estate does not only provide shelter, it can become a business when used right. The method may be risky but the worth of real estate in different markets makes for a good investment.