How to Convert a Liability into an Asset

Your  BIGGEST expenses in your life could be MAKING YOU SERIOUS MONEY every single month. Instead of feeling the PAIN of bills monthly, what if you looked at those items as EXPENSES, and as things that made you MORE financially free?

They are the two sides of your financial ledger. A liability is an obligation. Often it means a requirement to pay for something like a debt that you owe. For example, your rent or mortgage is a liability, as are other types of debt. If you bought a TV at Wal Mart and put it on your credit card to pay off over time, you just added to your liabilities in your life.

An asset on the other hand is a resource or property you own or control and can use to produce positive economic value in your life. These are things like stocks that might pay a dividend income to you over time or investment real estate that can pay cash flow and can appreciate over time. Sometimes things aren’t as clear and may appear as both assets and liabilities. But our goal in this is simple: to make money on your biggest life expenses.

Let’s start with the biggest expense: where you live.. Suppose you have a mortgage on the home you live in. In that case, that’s a liability because you OWE that debt to the bank, but the property secured by the mortgage might be a potential asset. If you currently need more income— you can use your residence as a rental property, turning it into an asset. But maybe you still need to live there. In many areas, demand for rental property is so high that you might be able to rent out half of the house, a bedroom, or even the GARAGE, and generate enough income to pay the mortgage (or more.) Now that liability is an asset. It used to COST you money every month. Now it’s BRINGING you money. If your house hacks effectively,  you might actually move out and rent the entire property to someone else. In that case, you may earn a more significant profit.

What if you don’t want to rent out your house full-time? What then? Well What if you can make part-time use of your home as a rental? If you don’t want to move out, but you have another option for short-term arrangements, consider using your home as a short-term rental. You can charge more for short-term use than long-term rentals, and maybe you limit the availability to several times a month. If you live in a high-demand area, this might be very lucrative and strategic. And utilizing Air BnB can give you a big increase in income seasonally if you live in an area that draws tourists. 

Another possibility is to use the equity in your home to earn money. Be careful with this approach because you will add to your liability (mortgage debt) in pursuit of income by taking on a second mortgage in most cases. But if interest rates are sufficiently low, you can take a home equity loan and invest the money in something stable that pays consistent income like a real estate fund or an income fund. As long as your mortgage payment is below the amount you’re making from those investments, and those investments are stable and reliable, then you are arbitraging effectively and netting a gain.

What are other examples of big liabilities that can be assets?

Like your mortgage, if you have a car loan, it’s a liability because you have promised to pay the loan every month. But what if you rent your car to someone who needs it? Or provide your car for short-term rentals like you did with your house? You may gain enough to pay the loan and even earn a profit. There are local exchanges like Turo where people rent their personal cars to other people. The prices are lower than what a car rental company would charge, and if you rent it several times a month you could cover your entire car payment. Still, if you don’t need the car sometimes, you can earn extra money by temporarily renting to someone who does. Ensure that you charge enough to cover all the costs associated with car ownership (payment, insurance, maintenance, and depreciation).

What about business liabilities?

Like a person, businesses have a balance sheet that lists their liabilities and assets. The assets are what the company owns, and the liabilities are what it owes. For example, suppose your small business owes $5,000 to a creditor in payment for merchandise you bought. The inventory is an asset, and the debt is a liability.

Suppose your customers paid you in advance for that merchandise, for which you have not yet paid the supplier. You may require advance payment, but your vendor allows a 30-day payment window. Now the money you have received from the customers is an asset. You can use the money for something else between receipt and payment. This window of time allows you to conservatively improve the business in the short term while paying the debt at a slightly later time.

Another good example is using your property or equipment to earn money. Suppose you invested in a machine that you need for your business and paid for it with a loan. That loan is a liability because you must pay the amount due monthly. But if you don’t need to use the machine constantly, perhaps you can rent it daily or hourly to another entrepreneur who hasn’t invested in the same equipment. That rental fee can help you make the loan payment or even contribute to the bottom line. I saw this a TON when living in LA for things like recording studios. In the world of podcasting, having a quality recording studio offer BIG value to someone who may not have the ability to buy all the top-of-the-line equipment, but still needs a place to record their show.

With these examples, the most important thing is being creative and finding how to add value to what you already have. Offering these liabilities at a higher rate on a short-term basis is a huge win in the current economy. But the question is, what do you do with the extra money you’re making?? If you haven’t looked into income funds, I HIGHLY recommend checking them out and understanding this extremely valuable investment model.