Your Home: Asset or Liability |
30 Comments |
I was reading The Simple Dollar the other day. Actually I read it nearly every day. He was doing an overview of Rich Dad, Poor Dad, a popular personal finance book. The overview was pretty much as expected except for this one line that I hadn’t thought much about before now: “…rather than seeing an asset as something with value, [Rich Dad, Poor Dad] defines an asset as being something that generates cash flow. This means that according to this book, your home is not an asset.”
I thought about this for a little bit. Is your home an asset? I guess the first thing is to decide what is an asset. By definition it’s anything that has value. I can agree with that in a literal sense. However, if we are to take the Robert Kiyosaki version of asset as anything that generates cash flow, we get something, much more powerful. Imagine how powerful this thought process can be. Suddenly, buying a DVD isn’t just buying a DVD, but it’s adding a new liability. Putting money in the bank and collecting interest brings cash flowing making it an asset. Everyone would rather have assets than liabilities, so it makes saving and investing a natural instinct. Even if you don’t agree with Kiyosaki’s definition of asset, it certainly can be a motivating psychological trick.
Back to the house… as your primary residence is it an asset or a liability? I think many can agree that it has value, which by the traditional definition would make it an asset. However, few people can afford to buy a home outright. Typically they get a mortgage after putting 20% of the value of the home down. Let’s imagine you bought a shack in Kansas for 1 million dollars. I believe most people could make an argument that that specific mortgage is a liability. On the other hand what about if I were able to purchase a big condo in New York City for $100? Very few people would hesitate to call that an asset and quite an asset at that.
What I’m going to conclude is that purchasing a home in most cases is neither an asset or a liability. Over time if it appreciates, I would say it can turn into an asset. If it depreciates, I’d call it a liability. What are your thoughts?
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April 27th, 2008 at 8:45 am
Anything that does not continue to generate an income is a liability.
March 16th, 2008 at 4:07 pm
[...] question has been addressed many times on such blogs as LazyMan, MillionareMommy, The Motley Fool, SmartMoney, Yahoo!, MoneyMonk, and Free Money Finance. There are [...]
October 11th, 2007 at 4:43 pm
[...] with this one - lets start with a few of the folks I’ve seen post on it already - Flexo, LazyMan, Jim, Matthew, Smith Financial Place, MyMoneyBlog, Associated Content, FreeMoneyFinance, Canadian [...]
April 21st, 2007 at 2:59 pm
The whole asset/liability thing is not the issue. The issue is what do you want your net worth calculation to represent? I think most people when figuring out their net worth want to know/track the value of all of their “physical stuff”. A college education is very valuable and adds a lot to ones income, but I have never seen that kind of thing in a net worth calculation.
Net worth should/will include one’s equity for most people.
I personally don’t intend to ever buy a house. I don’t want one. I don’t want to feel tied down and I don’t want the hassle. Is it better to buy than to rent? Yes, IF you live in the house for several years (5 ). Which the average person/family doesn’t.
April 19th, 2007 at 3:31 am
I agree with Flexo.
The home is an asset. The mortgage is a liability. They are two separate things.
The absence of income from the home is irrelevant to the question of whether something is an asset: lots of assets do not generate income: zero coupon bonds, bank bills, bullion, art, wine,shares that do not pay dividends and your home. The fact that there may be cash outflows does not turn an asset into a liability. Lots of assets generate negative cash flows over part or even all of their economic lives: consider any business development project (take a property development or an oil and gas field as examples), a negatively geared investment property, a wine collection or an artwork.
Whether or not something generates a positive “return” and the size of the return is also irrelevant to the question of whether your home is an asset: those are factors which determine whether or not it is a good investment. (Credit card driver’s comment above is also relevant: there are important non-financial considerations to owning a home.)
The fact that there may be a liability (mortgage) secured against the home does not turn an asset into a liability. Why should it? They are two separate concepts. If the fact that a liability is secured against a home turns the home into a liability, then the same logic requires that any asset (e.g. investment properties, shares brought on margin) which has a liability secured against it to be treated as a liability.
I fail to see why a home (and the mortgage liability) should not be taken into account in determining net worth for general financial purposes. Compare a person who rents and has no savings with a person who owns a home with no debt but has no other assets. (An extreme example but it illustrates the point.) If you exclude the home from the second person’s net worth then both people are in the same position - which is obviously not correct. Financial institutions which prepare wealth surveys often (usually?) exclude it. However this is done for the simple reason that the institutions are looking for potential clients and, for this purpose, they recognise that an owner occupied home is unlikely to be something the insitutions can earn a mandate to manage.
Relying on your home as a source of retirement savings is probably a bad idea. I appreciate that this is more debatable but I see no logical reason not to at least acknowledge the value of the asset for financial planning purposes. It certainly can and should play a role in financial planning - and it does in mine.
Without wishing to be inflamatory, I fail to understand any of the arguments put forward for claiming that a home (with or without a mortgage) is a liability or for excluding a home from a net worth calculations.
April 18th, 2007 at 11:55 am
Your home is an asset, but you should not count it as part of your net worth - if you are trying to be rich. Technically, it is an asset, because if you liquidated everything you own, the profits of the sale of your home would be applied against liabilities. BUT - if you can’t take money out of it at any time, you’re fooling yourself if you think your home is part of your actual, liquid net worth. To put it a little more simply, owning a home you live in is NOT investing in real estate and is NOT counted in terms of net worth in many cases by actual millionaires.
April 17th, 2007 at 8:40 am
[...] Your Home: Asset or Liability? [Lazy Man and Money] [...]
April 16th, 2007 at 3:38 am
[...] 3. Your Home - Asset or Liability? [...]
April 16th, 2007 at 1:14 am
I think people in this country are obsessed with the asset/liablity issue. Your home is simply your home. It is not meant to generate money. It is a place where you you can feel at home.
April 15th, 2007 at 7:21 am
Kiyosaki is as usual with this very fuzzy but pointing people in actually a good direction. There are assets as in things you owe and then an economist would say there is “capital”. Capital is an asset that earns a return. This return is though not neccessarily in cash. Google stock pays no dividend - so would Kiyosaki say it wasnt an asset? But it does appreciate and that is the return. Your house might appreciate but the main return is that you don’t have to pay rent. Everyone, has to live somewhere. But if you buy a bigger house than you would otherwise rent then the only possible gain is from appreciation and there are lots of added interest, property taxes etc. that will exceed what you’d pay in rent. In the long run houses haven’t appreciated as much as stocks so that extra house you don’t need is a poor investment in general unless you happen to buy at a low price and sell at a high one. It’s better to invest in investment property than to buy a too big house. That is what he wants to lead you to. But he probably only has a vague idea of the economics and he’ll reduce his audience the more he gets into the actual economics of it.