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Your Home: Asset or Liability

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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?

Last updated on June 3, 2007.

This post deals with: ... and focuses on:

Real Estate

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34 Responses to “Your Home: Asset or Liability”

  1. Flexo says:

    I’ve commented about this on every blog that brings this topic up. An asset is something you (can) own. A liability is something you (can) owe. Kiyosaki wants to make up his own definitions, but a “Kiyosaki asset” is simply a cash-flow-generating asset and a “Kiyosaki liability” is an expense-generating asset. It’s one thing to say that expense-generating assets should be *treated like* liabilities, i.e. eliminated wherever possible, but it’s another thing to say they *are* liabilities.

    Why give the public incorrect definitions which can confuse them later on if they want to interact with the rest of the financial world, where assets and liabilities are clearly defined?

  2. A primary residence is your shelter. As your shelter and a thing with value it is an asset, but it also has expenses which are in fact liabilities. Is your house a positive or negative asset? Add the NPV of liabilities to CAV of assets resulting in a positive or negative value.

    Personally, I think your house as a primary residence should not be thought of as an investment. It might turn out to be, but thinking of your shelter as an investment can lead to complacency in what should be your primary savings vehicle until benefits are maxed out: retirement.

  3. d says:

    I believe a home is an ASSET and an EXPENSE. Meaning that the Asset is derived from your portion of the ownership and the Expense is your cost to live (whether rent or home purchase).

    A home remains in both categories as long as you have it. For the “expense” never goes away, even without a mortgage – taxes, insurance, repairs etc.

    The Mortgage is a LIABILITY and EXPENSE.

  4. broknowrchlatr says:

    I think it is an asset, even by Kiyosaki’s definition, for 2 reasons.

    1) Although it could depreciate over the long term, it is much more likely to appreciate. This is similar to stock investments which are also considered assets.

    2) Think of it compared to rent. If you own a home, the rent you would pay for a home that is exactly the same would be pretty high. If you add the interest portion of your monthly payment to taxes and insurance, and add a bit to account for maintenance, you will come out at a number lower than what it would cost to rent such a home. So, you have 2 components. The first is a liability of paying a monthly rent payment. The second is an asset. This asset is offsetting the liability. As you build equity, the asset grows until it 100% replaces the liability. At this point, you have no monthly payment. But, you still have an asset that is causing a liability to not exist.

    If you get a bigger house, you are simply increasing your liability and your asset. This is the same way banks think of your loan. They have an asset (the money you owe them and are paying back) and a liability (owing you home equity).

    You can think of other investments this way. Say you are a hot-shot on Wall Street. You get a hot tip on a stock and buy $100,000 of the stock on margin. Say you pay 6% on it. So, you immediately have $100,000 liability and a $100,000 asset. If, in 1 year, the stock goes up 10%, you now have $110k asset and a $106k liability. I think most would agree that this means your net worth is up $4000.

    I count a car as an asset in the same way. You could really count everything you own as having an asset portion and a liability portion. But, most things we buy depreciate over 75% when we walk out of the store so the calculation is almost pointless (and we don’t count it in net worth). Nevertheless, everything you buy is technically an asset.

    If you are to not count a car or home as an asset, you are saying that the purchase of either causes an immediate hit to your net worth and that implies that it is not a good financial action (which, in my mind, is incorrect).

  5. Jason M says:

    An asset is anything that has value. The benefits he spouts about relate to income producing assets (ie rental property). Generating cash flow with an asset is great, but it is not the defining characteristic. His point is that your primary residence generates negative cash flow, which is true, but certainly does not mean that it is without value. I’m sure we could all rent out rooms in our homes to make it what he calls an asset, but who wants to do that?

    Kyosaki is little more than a used car salesman who targets the poor and uneducated to sell his books to. There is a website out there (www.johntreed.com) that gives reviews of all the self-appointed real estate and get-rich-quick gurus.

  6. R. Stavros Bezas says:

    Simple answer: You need to live somewhere. Those who treat their homes as investments are going to end up shorting themselves either by disappointing returns on the sale, or the perception that your house is something that you own to provide you with money instead of a comfortable life for you and your family.

    I draw a line between my investments and the things I must have in my life in order to be happy. My only goal is to be reasonable and rational when it comes to the ‘liability’ purchases.

  7. Shaun Noonan says:

    Forgetting the terminology for a moment, the concept is obviously sound as some people have pointed out above. I do like the point of view that it generates.

    I think you have to look very deeply into the housing market to see if the “asset” term holds true. You could come up with what you’d call a reasonable housing cost.. what you’d pay to have a place to live. Rent or buy. That’s a baseline to work from that you can exclude from your “asset” calculation.

    Suppose the appreciation significantly beats (owner maintenance loan costs other OWNERSHIP costs(??)) – (reasonable housing cost) over the life of your ownership of the property. If it’s a real money maker from that point of view, just on a longer timescale. If you have rock solid trust about the market, it could be actually generate cash flow in terms of a HELOC. Otherwise, I don’t see how it can be a cash flow generating asset. Then it’s a just a “liability” and a nice place to come home to at the end of the day.

  8. Dong says:

    I agree that a Home is an Asset, and partially just because I’m loathe to agree with R. Kyosaki. However, I think at the same time I’m not partial to the idea of including the value of my home (beyond what I paid for it) in the calculation of my personal networth for my personal use. It’s not likely that I would sell my home if I needed money, and would rather not lump my home in with items that I would sell for cash.

  9. Major says:

    Your primary residence is an asset, especially while you are paying for it.

    If you use the Kiyosaki argument that an asset is that which creats cash flow – then you would have to break down the parts of the monthly mortgage payment. While the largest such portions of the monthly payment go to interest, taxes and insurance – the remaining portion essentially is returned to you as equity ownership in the physical asset. This increase in equity ownership would not occur if you were leasing or renting a primary residence. With one payment you would be able to both decrease your overall long term and short term liabilities and increase your assets. I cannot see how that would not be considered cash flow.

    As for personal net worth, I do not include what I owe on the house, nor the current value of the house. I feel that by adding those in you so greatly distort your true net worth. Even with nice round figures my net worth would be $200K higher if I included what we owe and what the house is worth (based on the selling prices of the two houses across the street).

  10. Moneymonk says:

    I wrote an excellent post of this a couple of months back

    It’s an liability until it is paid off

  11. Flexo says:

    The mortgage is the liability, the house is the asset. The two are separate entities, but they combine to form what is called the “equity” in the asset… And your equity can be negative if you owe more than whatever you decide (and it’s a guessing game) is the cash value of the asset.

  12. limeade says:

    I don’t really think it’s worth arguing about so much as long as you understand the principle behind what he’s talking about. Your banker or loan officer will look at it one way (with the house as an asset), and you might decide to look at it another way. The point he’s trying to make here is that you should buy things that generate income for you. A house definitely doesn’t do that for you.

    Try to understand the lesson, and quit arguing semantics to no useful end.

    -limeade

  13. debttodreams says:

    I guess it becomes an asset when you pay off your mortgage and rent out the basement to you kids when they try to move back home after college.

  14. […] Your Home: Asset or Liability. Asset, period. A mortgage is a liability, a house is an asset. […]

  15. Personal Finance and Investing Blog » Blog Archive » Start Your Morning With the Top says:

    […] Your Home: Asset or Liability. Asset, period. A mortgage is a liability, a house is an asset. […]

  16. Joseph Sangl says:

    I like the fact that Kiyosaki states that the mortgage is an asset – for the bank!

    I personally love the 100% down payment plan on houses, but that is totally unrealistic for most people. Why? Because a few generations ago, our parents and grandparents started financing everything. That means that a minority of parents are able to help jump-start their children into a house and a debt-free lifestyle!

    Imagine what life would be like for your children if you could start them off with a paid-for college education and a paid-for house!!!

  17. The house you live in is a liability because you pay for it continuously, like a loan that goes on forever. It will never generate wealth for you unless you structure something like borrow against its “value” to invest. Everything you consume (house/car/food/clothes/etc) is wealth potential gone, and everything you invest has a future value.

    I will probably never fully “own” my house because a house is a very static and wasteful place to hold that much value.

  18. […] Is Your Home an Asset or a Liability? – Lazy Man takes a stab at making the distinction and a lot of discussion followed. Check it out and decide for yourself. “¢ del.icio.us “¢ Digg it “¢ Netscape “¢ reddit “¢ […]

  19. This is one of the things that I love about Kiyosaki. He says stuff that is “wrong” by most standards but serves as a very good “thinking point” when looking at your own finances. Because there are far too many people who base their Net Worth on their homes…. homes which require regular payments (even with no mortgage) for taxes, insurance, maintenance, etc.

    It’s a point that’s well worth considering. I live in a rented apartment, but I am about to close on a condo that I am going to renovate and rent out (my first real estate purchase). If all goes well, I will do this two or three more times before I buy something for me to live in personally. Hopefully by that point, the mortgage payments on my personal home will be more than covered by the rents from the rental properties. This is what Kiyosaki calls “buying assets to fund your liabilities.” He’s obviously not against homeownership, but he wants to change your way of thinking about it. Yes, it is an asset in the traditional sense…. a very illiquid, non-movable asset that sucks cash on a regular basis. Should you really be so proud of such “assets”?

  20. […] Your Home: Asset or Liability by Lazy @ Lazy Man and Money. This gathered interesting comments. Here is a taste: An asset is anything that has value. The benefits he spouts about relate to income producing assets (ie rental property). Generating cash flow with an asset is great, but it is not the defining characteristic. His point is that your primary residence generates negative cash flow, which is true, but certainly does not mean that it is without value. I’m sure we could all rent out rooms in our homes to make it what he calls an asset, but who wants to do that? Kiyosaki is little more than a used car salesman who targets the poor and uneducated to sell his books to. […]

  21. moom says:

    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.

  22. 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.

  23. […] Your Home: Asset or Liability? [Lazy Man and Money] […]

  24. silverbax says:

    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.

  25. 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.

  26. jh says:

    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.

  27. […] 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 […]

  28. […] question has been addressed many times on such blogs as LazyMan, MillionareMommy, The Motley Fool, SmartMoney, Yahoo!, MoneyMonk, and Free Money Finance. There are […]

  29. Ron says:

    Anything that does not continue to generate an income is a liability.

  30. Dom says:

    Simply Put by Ron, “Anything that does not continue to generate an income is a liability”

    Assets as Kiyosaki puts it are things that put money into your pocket. Liabilities pull money out of your pocket.

    A house does very little to put money into your pocket. Sure it goes up in value but you can not really use the “Equity” until you sell. the whole time your paying out of pocket to live in a home. Why do people sell their homes most times then not? Easy, to move into a bigger home, where they use the “Equity” of their last home to put towards their new bigger home and move up in the middle class. So essentially they will never get to touch the “Asset” part of their homes “Equity” Very few people will ever fully pay their house off. Most people will take the “Equity” out of their home to pay off debts (liabilities) leaving them owing more now to the bank for their house then the “Equity” that is still in the house.

    In the long term a rough estimate is a $200,000 home will cost you over $350,000 – $400,000 by the end of a 25year mortgage. So your paying out the nose for something that the interest is eating you a live. How is that an asset?

    We all need somewhere to live. You can’t just sell your house and Tada your made a profit. Now where are you going to put your profit? Exactly, back into another home so you can have a warm place to sleep at night. Cha-Ching, back into the liabilities column you go. its taking money out of your pocket again. Rarely do you see a direct “Flow” of cash.

    Some of these guys here need to re-think R. Kiyosaki’s words “Cash flow”. Its’ the flow of money not the “sit and wait years till its worth something” type of idea. Where is the flow in sitting and waiting 25 years? most of you will probably be dead by that time. If you want your money working for you right away, focus on the “Flow” of cash to pay for your living style. i’m 26 years old high school drop out and I know that. Hell, i’ve already made my 2nd rental property transaction and its brining in an additional $600/month in “Cash Flow” on top of my existing rental property of $535/month into my bank account every month. These combined pay for my mortgage on my current condo just outside of downtown as well as my strata fees and taxes. I’m living free and clear on my “Cash Flow” and use my money from my 9-5 to start investing into more assets.

    Some people who bring down R. Kiyosaki as a “Fraud” or “Used Car Salesman” really need to get their heads out of their asses and take a look at their own life. Get out of the stage of denial and give your whole life a shake. Your too old or your too stuck in your ways and obviously paddling against the tide because your working in the wrong direction fighting for financial freedom that if you just turned around would come so easily to you.

    As R. Kiyosaki says in a lot of his work, does a stock broker invest in stocks? does a real estate broker invest in real estate? I wrote a paper on this to explain to my boss that 1 out of every 10 people I interviewed actually did personally what they try and do every day for their 9-5 job. Thats 1 our of every 10 stock brokers actually invest in stocks. It was quite depressing. After interviewing 160 people only 16 of them knew what they were selling and stood behind it by investing as well.

    I come on here telling you these things because i’ve done them. Some of you sound like you come on here with your “Opinions” THINKING you know what your talking about, in most cases you do have valid points, others, just sound like your running a dead end program in your personality and that your to afraid to research the truth or your in denial about money and investing.

    Do this, get rid of the word “Net Worth” and use the word “Financial Wealth” do this test to see how you fit. Financial wealth is how long can you last with out a paycheque? most people can not survive more then a month with out a paycheque. If your home is an asset where is the “Cash Flow” to help you if you lose your job? most chances your going to have to foreclose your house because you can’t afford to keep up on the payments…. Right now, if I lost my job, my condo is covered, I can keep a roof over my head and the head on during the winter. My liability, which is my car, would have to go but that will change when i close the 3rd property in the near future.

    If your offended or angered by what I wrote, please, explain your self, i’d love to hear it.

    Cheers
    Dom

  31. […] Reinvestment Plans (DRIPs). DRIPs are a good idea if you “believe” in a company. * Your Home: Asset or Liability. Asset, period. A mortgage is a liability, a house is an asset. * A Different Kind of Rich. If you […]

  32. […] Reinvestment Plans (DRIPs). DRIPs are a good idea if you “believe” in a company. * Your Home: Asset or Liability. Asset, period. A mortgage is a liability, a house is an asset. * A Different Kind of Rich. If you […]

  33. Steve Hemm says:

    My perspective: your home is an asset when the income generated is positive. Even if it has gone up in value, you have some mortgage left, property taxes, insurance & other maintenance charges. If you rent it out & generate enough or more than all expenses, it’s asset but if you have just build equity that you are not using then it’s your bank’s assets. If you pull out the equity (via heloc or refinancing) & then invest somewhere else (like stock or business or rental property) where it is generating more than your overall expenses then it is an asset.

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