Liabilities and assets comprise a state financial. The financial statements help individuals and companies to determine their net worth. Most of the liabilities are obvious. If depreciate in value and make you lose money over time, they are added to the liabilities column. However, home mortgages are not as easy to identify as a passive or active due to the cyclical nature of the market real estate.
Liabilities are debts. Since a mortgage is a type of debt, you may automatically assume your current mortgage is a liability. However, keep in mind the impact of the sale of your home. If selling your house to its current market value is in profit, your mortgage can fall into the asset column. In determining whether you should add to your mortgage column liabilities or assets in your financial statement, an assessment uses short and long term. Paying a mortgage without any intention to sell, creates a liability; but if you use your home to take advantage of short – term gains in the market, your home can be considered an asset.
There are many types of assets, including cash you have on hand, investment portfolios and personal property whose value appreciates over time. With the exception of a housing crisis, experts suggest that a house is revalued at a rate of 5% per year. This makes some owners automatically assume that their houses are active. However, real estate income generation are referred to generally as an asset. You pay mortgages and do not generate money monthly, they are not considered assets. Until the mortgage generate a profit, either by sale, property improvements or through tenants, not an asset.
The market and profits
The poor condition of the housing market may lead to foreclosures. In turn, foreclosures decrease the market value of your home, which can leave you “upside down” on your mortgage. The phrase “upside down” is when homeowners owe more on their mortgages than the current market value of their homes. A mortgage can be a great liability when the value falls below the balance of your loan. If you sell the house, you lose money. Also, if the value of your home is not revalued, the sale can drop you at breakeven. In this case, your debt does not produce income and the mortgage is a liability.
In commercial real estate, the term “toxic asset” refers to real property generating income starts losing money. For example, banks with large amounts of property owned by uncapped can implement strategies to mitigate the loss and get rid of toxic assets. The properties are uncapped property foreclosures that were not sold at auction. For a homeowner, losing money on a mortgage is a liability. Since commercial real estate companies often have sophisticated strategies in place to mitigate the losses of investment properties still have, they are active.