TheProsperousPeasant.com

We were in Hawaii recently when I had an unforgettable encounter with a retired gentleman living in Kaimuki, a neighborhood of Honolulu not far from Waikiki Beach and the University of Hawaii.

“I always thought that paying off my mortgage would be enough,” he said wistfully, speaking of his retirement. “It wasn’t.”

We were standing on his lawn, appraising the ramshackle cottage standing next to his home. His dilemma? Though property-rich—his mortgage-free lot is worth at least a million dollars—he’s too cash-poor to remodel and rent the cottage to supplement his Social Security income.

Like most of his generation, he lived under the assumption that, for the average person, home ownership was the key to prosperity. And like many, his only clear financial goal was to pay off his mortgage.

Now, he faced a harsh reality: Until you sell or rent your home, it produces no income for you. In fact, it costs you money: in property taxes, insurance, upkeep, and repairs. In this sense, it’s a liability rather than an asset—again, until you sell or rent it.

And that’s where the problem lay. This gentle man from Kaimuki was healthy and wanted to stay in the home he’d lived in for many years. Selling would bring only enough to buy a comparable house, so the only option he saw for freeing up cash was to sell and move to an apartment or rental condominium. But that would mean an unfamiliar location, less space, no lawn or garden, and most important, the loss of a beloved gathering place for his children and grandchildren.

So there he stood, a millionaire on paper, but a pauper in attractive options. Maybe now he’s considering a reverse mortgage.

Home ownership is important, but it’s dangerous to think of a residence primarily in investment terms (for a devil’s advocate take on the home ownership, see “Rent Forever” at Bargaineering).

In 1990 I bought my first home, a 493 square foot leasehold condominium not far from Kaimuki, for $127,000. Its value promptly dropped by half. Sixteen years later, I finally sold it, at a price that would have meant a pretax annual return of less than 1.5%, had I lived there the entire time.

That was a terrific lesson in home ownership, one that’s persuaded me to stay away from costly “trophy houses,” and to remember that—for most of my life—my primary residence will be a liability, not an asset.

See also: “How Much is Enough“