Your House Is a Liability

Houses are wonderful things. They give you a place to stay comfortably out of the elements, to store stuff, and even to cook a meal or two.

Then there’s the financial side of things. A house is commonly cited as the biggest and most important purchase of your life, and it’s often presented as a rock of stability in your retirement planning*. In fact, many advisors signal paying off your house as a precondition to retirement. 30 years of steady payments (and hopefully steady appreciation), and this massive asset built on a solid foundation will be all yours.

That is, of course, unless it burns down, blows up, washes away, rots, falls to pieces, or is condemned.

There are mundane aspects of home ownership that make a house a significant liability. Taxes, maintenance, and mortgage interest all diminish the value of this “investment”.

But there are far more dramatic ways that things can go wrong. They can wipe out your investment, your prized possessions, and even you and your family.

Fire

This is the old-school risk of the bunch. Fire has been used in homes for thousands of years, but we still seem to be having trouble mastering how it works.

To the annual tune of several hundred thousand residential building fires and over $7 billion dollars worth of damage, according to a report of the U.S. Fire Administration.

A single spark can lead to a life-changing experience. And a blazing inferno isn’t the only threat – partial combustion of carbon-based stuff can lead to carbon monoxide poisoning.

Water

Having running water in a house is awesome. A hot shower or bath is truly one of life’s great luxuries, and we should all give a small prayer of thanks every time the toilet magically whisks things away. It’s hard to grasp that for much of human history this was not the norm, and for wide swaths of the world, it still isn’t.

But this awesomeness doesn’t come free. To make it possible, water is lurking throughout pipes in your home. At a pressure of 50 pounds per square inch or more, just bursting with excitement to come out. And while you’d like water to stick to the playbook and just come out of faucets and the like, water itself is pretty agnostic; it just wants to be free. It’s just as happy to gush out of a broken pipe or cracked hose.

If you’d like to get a good sense of the fun that can happen from a plumbing problem, go look at your nearest water tower. That’s the amount of water that could fill your house if you have a plumbing problem (actually it’s more than that, since they’ll helpfully refill the water tower, but you get the point). An unchecked leak can cause tens of thousands of dollars of damage.

And even slow leaks of water to places it doesn’t belong can be devastating. A little stachybotrys mold problem will make you wish for the days of an outhouse.

Natural Gas

Natural gas is a relatively clean burning fuel that is quite handy in the house. It can efficiently power furnaces, water heaters, stovetops, and clothes dryers, and it’s cheap, too.

The only rub on natural gas is that it can kill you.

Natural gas is a poison by itself, but it’s at its worst when you add a spark. A natural gas explosion may be far less common than fire or water damage, but it makes up for its rarity with total destructive power. If you have fire or water damage, people might ask how bad it was and how long it will take to fix. If you have a natural gas explosion, you probably won’t have a house anymore.

Electricity

Where would we be without electricity? In a dark, microwave-less and entertainment-less wasteland, that’s where. Reading books by kerosene lamp. Or just playing with rocks.

Thank goodness we can now enjoy our cornucopia of gadgetry in the comfort of our homes. But electricity does bring some risk along for the ride.

First, of course, is electrocution. A shock can range from “ouch” to death, but being killed by electricity isn’t the most common way it threatens in the home; the Electrical Safety Foundation International estimates just a few hundred people are electrocuted in the home in the U.S. each year.

But Electricity is a major tag-team partner of Fire. Old or faulty wiring, creative use of extension cords and expansion outlets, and misused or faulty appliances can all lead to fires. Of the $7 billion of annual residential fire damage in the U.S. Fire Administration report, almost a billion is due to fires from electrical malfunctions.

 

A House of Cards

A home isn’t a gold bar secured somewhere in a safety deposit box; it’s a complex structure that combines a lot of vulnerable materials with useful but dangerous utility systems. Some of the things that make it great – heat, water, and electricity – can also be the source of its destruction.

As much as we’d like to just sit and passively watch our houses appreciate and hand us a huge financial windfall in 30 years, that’s not realistic; this asset, which seems so wonderfully solid and secure, can be gone in an instant. While insurance may help in the event of a disaster, an uncovered or partially covered loss can be financially devastating. Plus, there is the fact that some of these risks can actually kill you, in which case a fully paid claim would be a rather thin silver lining.

Understanding how vulnerable your house can be, and how much of a financial liability it can represent, is the first step in protecting its value. Once you grasp everything that can go wrong, actively managing and mitigating these risks will be the obvious solution.

Sobering stuff, to be sure, but it’s going to take some work to keep your house firmly on the asset side of your balance sheet.

 

* I personally don’t think a residential house as an asset is all that it’s cracked up to be. If you could live in a tent, and invest what you would have spent on a house in equities, you’d surely come out ahead. Living in a tent may be no picnic, but it just goes to show you that the benefit of living in a house is in the amenities – like warmth, protection from bears, running water – we get to enjoy, not its return as an investment.
Rental real estate is a different animal, of course – in fact, if you can rent your house to someone else and live in the backyard in a tent, that would be a nice financial setup. Maybe your tenant would even let you use the bathroom.