In some circles, there’s an argument whether real estate ownership is an asset or liability. There are arguments on both sides, but the answer isn’t always so straight forward. It could be either, or both. Generally, anything owned can be considered an asset or liability. The problem lies in 4 questions.

1. Who owns it?

• Do you own it outright with no loan or lease, like a fee simple property?
• Are there multiple owners, like partnerships, family trusts or incorporated structures?
• Is there institutional ownership like a bank, lending company or lease holds?
  

2. How much does it cost to keep it?

• How much will you pay in insurance and taxes to keep your investment?
• What’s the cost of maintenance and management fees?
• Do you have to keep reserve funds or money set aside for maintaining the asset?

3. How much was paid?

• This is not only the initial purchase price, but the final cost after the loan is amortized minus the tax benefits accumulated over the years.
• The purchase price must include all closing costs and initial investments made to obtain the property. 

4. What price is someone willing to pay in the future?

• This is the most difficult to answer, because it’s all speculation (thus the term spec properties).
• The selling has more to do with demand and what others paid for comparable properties in the area.
• There’s also a cost to selling real estate especially when a broker/realtor is used (typically 8% of purchase price for commercial and 6% for residential).
• How long the property sits without generating income (no renters, unfilled occupancy rates or lack of renters if its empty while being sold).

Real Estate: Asset or Liability?

Liability:
A loan makes it a liability (at least according to IRS). This is because you don’t own the property the bank does. You have to make mortgage payments which makes it a liability. However, everyone needs to eat and sleep somewhere and it’s nice not to have to pay for someone else’s mortgage through rent. 

Asset:
However, you can also build up equity in your property, which can help you refinance for extra cash, or use as collateral and even leverage the equity to invest elsewhere. But with a mortgage it’s still technically a liability. To make it a true asset you have to own it outright. Regardless if its worth more or less than the purchase price, it’s still an asset. It has value because it can be sold. However, real estate is not considered liquid (something sold easily, like gold or stocks and bonds). It can take a long time to sell a property, thus it’s not a liquid but regarded as more of a long-term asset.

So the answer is – it depends on who really owns it (you or the bank), how much you paid for it, what it costs to keep it and how much it’s worth today or possibly in the future. Depending on the variables, the answer may not be so simple.