A Home is a Liability, Not an Asset
The question of whether a home is an asset or a liability never really entered my mind until recently. I came home two Friday's ago after work to find the book, Rich Dad Poor Dad, in my mailbox. It was a gift from my girlfriend, who had heard me talking about how I wanted to read it a while back. After seeing the book, I immediately sat down and started reading it. Less than two weeks later, I'm thinking differently about my personal finance strategy.
I won't be doing a review on this book because I haven't yet finished it, but I do want to reflect two of the concepts mentioned. These are:
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A home is a liability, not an asset
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The poor and the middle class work for money and rich people have money work for them
A Home is a Liability, Not an Asset
This is a crazy point when you first hear it. I thought so anyway. *By the way, we're talking about buying a home to live in vs. buying a home to rent out. The thing we always hear is that a home is a good investment and that it is like paying yourself instead of paying someone else. When you're old and gray, you will own the house instead of owning nothing if you rent. A nice side bonus to home ownership is that you can deduct mortgage interest on your taxes.
Sure, this is all great, but to Robert T. Kiyosaki, the book's author, these points are irrelevant. His argument is that when you buy a home just to live in, you buy in to a liability. This home you are buying comes with many responsibilities, many of which are financial. You have to pay property taxes. You have to maintain the home when things wear out. You have to heat and cool the home. You also have to cut the grass, spray the weeds and rake the leaves in the fall. The bigger and/or more expensive the home you buy is, the more of a liability it becomes.
Honestly, I can see Kiyosaki's point on this. Sure, I pay $725 each month in rent, but it's fixed and not a liability. It's an expense. When things break, I ask to have them fixed. When the place gets old and worn down, the apartment complex upgrades things little by little. I simply budget for the expense every month and go about my life.
By owning a home, you sign up for a liability, even if you pay cash for it. Sure, you may get your money back out of it when you sell it someday, and maybe even some extra, but you still have to maintain the home while you own it. It comes with responsibilities, which can keep you from building wealth. Although I agree with Kiyosaki that a home is a liability, I'm not arguing that a person or family shouldn't buy one.
From a personal and family standpoint, home ownership certainly has its advantages and can be an asset to someone's personal or family life. Yes, I believe homes are great and that ownership is great, but I'm only saying that I agree with Kiyosaki in that it is a liability instead of an asset. An asset is something that makes you money instead of the other way around.
By the way, I'm not implying that renting is any better than buying. Either way, it's an expense. I'm only saying that I believe neither one is an asset. This belief now gets me thinking that I may want to wait longer to buy a home and instead keep saving.
The Poor and Middle Class Work for Money and Rich People Have Money Work for Them
This is also a very interesting point. The concept that Kiyosaki points out throughout this book is that the poor and middle class work day in and day out in the "rat race" and never really get ahead. He says that this happens when you work for money. Now, I've heard it said that you'll never make much money if you're using your body to do the work, instead of your mind. But this brings an entirely different concept to mind. This says that just being an employee and working for money, meaning trading your time for money, is being in the "rat race" and is going to make it hard for you to get ahead.
It kind of makes sense. When you work for money, you are too busy "working" all the time to really ever make any money. Money is to be made when leveraging strategic thinking and building on something. I've seen this with the company I work for. We build on something every day. We have a software application that multiple programmers have spent years building. It's an asset to our company because we own it, we control it and we can license it out and make money off of it. We also have spent millions of dollars building out a content library of digital assets, which combined with our software (or combined with the website software of other companies) is worth a ton of money because we can license it out. It's an asset to our company. Doing nothing else, those assets can make the company a pretty huge cash flow each month.
Having money work for you is about building assets that will work for you. It's about building assets that are worth something to others. Working for money means you're helping someone else get rich. You're helping build their assets so that those assets can work for them. To have money work for you, you need to focus on building assets of your own that will work for you.
This is some deep stuff, I know. I'm not suggesting that you all quit your jobs and go start your own companies, because that would be nuts. Starting a business is a big deal and can't be done at the drop of a hat. I'm still an employee and work for money. I don't plan on changing that anytime soon either, but still this is an interesting concept that really gets me thinking about my future.
What are your thoughts? How do you feel about a home being an asset versus a liability? How do you feel about working for money as opposed to having money work for you?
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11 Comments
- Brent Pittman says:September 5, 2012 at 11:28 PM
I've read the book and his cash flow quadrant. It is a challenging way to look at life and personal finances. He uses debt as a tool and that is dangerous, but also has a huge upside if you win.
- George says:September 6, 2012 at 6:01 AM
I bought my first home a little over a month ago, and with any luck I won't even be living in it for a year. I figured with mortgage rates at what will hopefully be an all-time low, and purchase prices for homes at about the same, it would be dumb not to make an investment if I could make it work. It's Investment 101...buy low, sell high. You mentioned rent as a fixed liability...it's not. Rent increases annually, in my case, it would have gone up from 682 to 722, which is nearly $500 EXTRA over the course of a year, or as I see it now, an extra payment on principal. I got my house at 7 grand below its asking price, which was still a pretty fair asking price. Now I'd obviously rather avoid dumping all of that 7 grand back into the house, but little improvements here and there are making it look aesthetically pleasing, and by the time I leave, a property easily worth a thousand a month in rent. So asset or liability? I've got a steady paycheck (for now) and enough wiggle room between the mortgage payment and a fair rental price, so I'd chalk this one up as an asset.
- Jason Cabler (@DrCabler) says:September 6, 2012 at 3:14 PM
I've read Kiyosaki and he really changed the way I look at money. I don't agree with everything he says, especially using debt to invest. His second book "The Cashflow Quadrant" is just as good, if not better than the first. I recently wrote a couple of posts that may be if interest, about whether or not a house is a good investment, and whether renting is better than buying. They both get pretty in depth on how the numbers work when it comes to housing and why what we've all been taught may not be necessarily true, which is more than I can get into here. You can check them out at these links. http://www.cfinancialfreedom.com/CFFwordpress/buy-or-rent-which-is-better/ http://www.cfinancialfreedom.com/CFFwordpress/is-buying-a-home-a-good-investment/
- AverageJoe says:September 11, 2012 at 3:18 PM
I loved this book and I'm sure you'll keep getting even more out of it. It changed my whole view on home ownership also. People who say that you're "throwing money down the toilet" by renting should read this. Hope your conference is going well, Kraig! Fun catching up with you at FinCon. I've never been so exhausted as I was Sunday afternoon.
- Jonathan Morgan says:September 11, 2012 at 4:35 PM
Great post. That's a good book with some solid points. I'd ask you to look at the last 3 paragraphs of your post again (regarding working for the money and making money for someone else). To reference your original point, that is similar to renting instead of owning a home. Renting is simply paying someone else to deal with the hassles of owning a property. If you value not dealing with those burdens, then renting should be your focus. Otherwise, home ownership could still be an "asset" in many ways (albeit not a huge cash generator).
- JP @ My Family Finances says:September 12, 2012 at 5:38 AM
I couldn't disagree more with Kiyosaki's point. I've always seen housing (renting or homeownership) as an expense. That's the way it looks on my budget and my financial planning. Most people who compare homeownership to renting often forget that homeownership fixes a portion of your living costs at today's prices. Rent is not static; it's going to increase with inflation. Homeownership is just about the only expense in your entire life where you can lock in at today's prices. In the area I live, housing prices are low and rent is high. I'd lose, quite literally, nearly a million dollars over my lifetime by renting.
- Kraig @ Young Cheap Living says:September 12, 2012 at 7:47 AM
Great point, JP. That is true and a good counter argument.
- Anonymous says:May 26, 2013 at 12:25 AM
Kiyosaki was not against owning a house. He just doesn't want people to call it an asset as it takes money out of your pocket each month in mortage payments, upkeep, maintenance, insurance etc. These are all expenses that you pay for. That means its a liability to you. Him and his wife owned a small house while they were building their asset column. It will be an asset to you when you sell it. A rental property that is cash flow positive, is when all the mortage, taxes, maintenance, insurance etc are payed by the rental income. So now money out of your pocket so that is when it is a asset. If the tenant moves out, the rental property comes a liability as the landlord has to pay the bills with his own money.
- Anonymous says:May 26, 2013 at 12:38 AM
There used to be a spreadsheet on www.richdad.com. It broke the asset column into assets and doodads. Doodads were liabities people think are assets. In the doodad section, there was personal residence and car as examples. Everything in these two sections of asset column were used in calculations assets total according to banker. Assets total according to rich dad didn't include the doodads. Basically, my view point, most people who have a house thinks its their biggest investment and sometimes there only one. They spend money on renovations, maintenance etc like crazy. In turn, they don't have any income generating assets. If a family starts with a starter home and by assets that cashflow, they can then use the cashflow from assets in the future to maybe buy a better house instead of being house poor.
- Doug says:November 15, 2014 at 7:16 PM
I have always found this interesting. The mortgage is the liability and the actual property is the asset. Like any balance sheet the more of the liability is paid the more equity the owner has in the asset. Owning helps you not have money go out the door unless of course you cannot afford your payment and you lose your equity. Still except for the mid eighties where I live prices have gone up so the underlying asset is worth more than the mortgage. Still I get nervous because the prices have to be strong and changes in the interest rate can affect affordability. Housing goes against my investing which is to not leverage, to diversify and have liquidity. Housing is a focus of most of my wealth going into one asset that I only can buy or sell the whole thing. Nice conversation. If I had been on top of my finances earlier in life I would have wanted to own my place in coordination with my securities investing.
- Jennifer says:November 14, 2016 at 7:43 PM
As a retiree i have to say that long term owning a place pays off . Of course there is complexity to any situation but even if I was to sell( around 700000.000 )and add that to my current assets the extra dividends and interest lets say which would be at 4 percent would just cover rental which in my city is high. I am lucky to have a luxury apt , my dream place and renting a place like this would cost a fortune, more tha a 4 percent payoff. Further my taxes would increase so that may not be so great either. As a woman, it is difficult to see a home just in terms of assets, it is security, a roof over your head, if times get hard at least I will not get kicked out by a landlord. I have done math on this matter alot and even with strata fees and taxes this place is more economical now that renting. As a retired person with a fixed income knowing rent or being kicked out is worth its weight in gold . When i die someone out there gets my place or seven hundred thousand dollars , not bad.
