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Primary Residence, An Illiquid Asset

I am writing this post as I am coming to the realization that my primary residence is an illiquid asset. In contemplating its sale, I am realizing what a weak investment a primary residence can be.

I am realizing how inefficient the real estate market is when it comes to the purchase and sale of a primary residence. Not only are there lots of fees to worry about but the process is very time intensive.

In this post I’ll talk about why my primary residence makes for a terrible asset.


Liquidity vs. Illiquidity

A classic liquid asset would be cash in your pocket. It is universally tradeable for anything you want.

The only reason it’s not the best asset to hold long-term is because it was designed to depreciate in value (inflation). It’s okay to have cash on hand for a couple of years. Beyond that, it will start decreasing in value due to inflation.

On the other end of the spectrum, an illiquid asset might be collectible items (art, cars, wine), a business, or shares in a venture capital fund.


Real Estate

The process of buying and selling real estate is truly a pain in the ass. The sale/purchase process is one of the factors that decreases the liquidity of real estate as an asset.

It’s ironic that we have peer-to-peer real estate investing but we haven’t yet evolved to selling our homes without the 5 middle-persons needed to execute the transaction. You can’t buy/sell a home without involving:

  • a bank
  • an inspector
  • a loan officer
  • an appraiser
  • and a realtor

There are other factors that will cut into the profitability, such as repairs, moving costs, and replacement costs.

Investment Real Estate

In the case of investment real estate it’s a bit easier. You don’t live in it and so you have no moving costs and the depreciation due to usage is something you get to write off on your taxes when it’s rented out.

When making decisions on an investment real estate there are fewer factors to worry about. There is less of an aesthetic concern. The purpose, in case of a rental, is to get a tenant in and keep them there as long as possible.

Even if the unit is rented, it’s quite easy to sell it as an income property. In fact, it’s a plus. The buyer will get the unit along with a tenant. Such properties are also purchased in cash so the process is much more smooth.

Primary Residence Real Estate

The aspects that make a primary residence an even shittier asset (aka illiquid) is that you need to find yourself a replacement place to live if you are going to liquidate it.

Also, the work that gets done on primary residence real estate is often of higher quality, more aesthetically pleasing, and therefore more costly.

If it’s paid off in cash then you get a minimal tax deduction for a portion of the real estate taxes. And you may also have staging costs and repair costs before it’s ready to be listed.

Selling Your Primary Residence

Let’s assume for a moment that your primary residence is an asset and not a liability. All assets require a bit of work before you can sell them.

In case of stocks and bonds it’s just making sure they have appreciated to your liking and then choosing which funds to list for sale. And then taking care of the tax implications from the sale.

In the case of primary residence real estate you have to consider the following:

  • finding a new place to live
  • fixing/upgrading the place before listing it
  • researching the comps
  • choosing a realtor
  • listing it and signing contract with realtor
  • moving all your belongings
  • selling some of your belongings
  • filing all proper change of address forms
  • applying for a new mortgage or for a lease
  • possibly staging the place
  • dealing with negotiations
  • inspection reports
  • filing taxes
  • shitload of paperwork


My Condo In Portland

It’s certainly a great time to sell my condo in Portland. I paid $140,000 for the condo and could sell it for close to $180,000. A 29% appreciation over 3 years.

I don’t owe any money on it and have a competent realtor whom I could work with. But there are still factors that I’d have to consider before making this move. The thought of dealing with the move and the paperwork is enough to turn me off.

And after all the fees and what I already spend to live there, I think the apparent equity is just an illusion.

The Math Of Selling

The condo is in a rent-ready and sell-ready state. The biggest expense will be the realtor fees. I wouldn’t owe any taxes because it’s still my primary residence.

I have probably spent around $6,000 (on average) a year on property taxes, HOA dues, and other small condo expenses (maintenance, renovation, repairs). Since I’m coming up on nearly 3 years, that’s ~$20,000 which I have already lost out on.

Add another $11,000 for my share of closing costs and I’ll be $30k in the hole. I could walk away with a $10,000 profit at most after all the fees and headaches.


Equity In Primary Residence

A home in NY, SF, SD, or LA certainly has a solid chance of appreciating in value and building equity. But the more expensive a home is, the more fancy the upgrades have to be and the higher the carrying costs.

I definitely think we should count the equity in our homes towards our net worth. But it’s also important to factor in the liquidity of the asset. I think I will earn more money in the long-run renting out my condo than trying to recover its equity through a sale.

Certain aspects of our net worth are more liquid than others. And a primary residence sometimes will offer more of an income if it’s turned into a rental rather than when sold.

When it comes time to selling your home try to think outside of the box. Consider doing a seller financing, consider selling it yourself without a realtor, and consider turning it into a rental income property.

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