Given the popularity of rehabbing and flipping houses on cable television, it's important to understand what is actually occurring. It might seem straightforward, but it's less straightforward than many people (novices, in particular) think.

When someone buys a house to rehab and flip for a profit, or to rent, he or she is undertaking a business proposition. In this regard, the house is really an investment. The goal is to increase cash flow: Buy now at one price and hopefully sell at a higher price in the near future. If the house is bought to rehab and rent, this too, makes it an investment.

But when a house is bought to rehab and owner occupy, it's not an investment. The house's primary purpose isn't to create cash flow, it's to provide shelter. In this regard, a house is an asset. Of course, over time an asset can appreciate in price and be sold in the future for more than it cost. Still, it's not an investment.

Noting the distinction between an asset and an investment might seem like an exercise in splitting hairs, but it's more than that. A house as an investment can be used to meet everyday living expenses, but a house as an asset can't. This distinction matters because it properly sets expectations on the economic purpose of that house.

Information provided by Jessica Regan.

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