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?