Your house is your biggest liability?

[Forskaren]

http://www.richdad.com/Resources/Rich-D ... asset.aspx

What do you think about classifying real estate that doesn't generate income as a liability and not as an asset? I like the simple definition of asset as something that put money into your pocket. A liability is something that take that away.

Liabilities:
-Cars
-Houses
-Boats

Assets:
-Rental properties
-Stocks
-Bank accounts


Of course you have to live somewhere, so you either have the cost from rent or have to own some place to live, which will be considered a liability.

Here in Sweden we have had a housing price boom for 20 years, so a lot of people have been rewarded for buying much more housing than what they need. So the general consensus seem to be that you can make money by having more empty rooms in your house, buying extra houses and having those empty most of the year. So that is a very good example of that you can make stupid investment decisions and get saved by pure luck and political decisions. I think it is highly unlikely that over the next 20 years that empty rooms will increase in value much more than the inflation. It may even be a housing bust.

[J_]

Things you use a lot like your house or boat are no liabilities to me. Only as you have them empty or too big for what you use/need with the intend of speculation that their price will go up you can consider them as liability.
Rigid definition does not always help.

[J_]

K

[Scott 2]

Attitudes in Sweden sounds a little like the US before the housing bubble popped. I had many people tell me their home was the best investment of their life, in 2006.

A house is an asset, in that it holds value and that value changes over time.

A mortgage would be a liability, as would the need to have a place to live.

I've started looking at my house as another investment. I aggregate the cost of taxes, maintenance, caretaking, interest, insurance, and my opportunity cost of invested dollars. I "bill" that back to my main budget as imputed rent.

So if I sold my home, invested the money, and moved into an apartment of similar quality, I'd come out about even.

In theory anyway. In reality, in my area rents are around 20% above any rational cost related to the home value. Since am not prepared to deal with renting out my home, I do not use market rent as my imputed rent.

[Sclass]

You need to be careful about how you take written words.

Rober Kiyosaki sold a lot of books by saying shocking things. It's part of his schtick. His first book was renamed to be something like "If you want to be rich don't go to college" from something like "The relevance of higher education in the modern world". He grabs attention by saying shocking stuff that challenges our understanding of the world.

I know because I had to convince a very close friend of mine that she was a victim of his con. Not that he doesn't have some good tips, but that he sells a lot of material to dumb hopeful types.

Okay as for the asset liability thing. I think what he was really trying to say is you cannot get very rich buying an expensive home and putting a lot of money into it. The long term rate of return of RE is not terribly high and most people aim to pay off their primary residence which diminishes the leverage over time. If you read his other investing books he encourages people to buy multiple units for low financing costs and get them rented out for a modest profit. The more house you live in the less you can rent out so to speak. I believe that is the motivation for the "definition" of liability that he keeps pushing. Ask a real accountant what a liability is or go read some real statements before getting your CPA from Kiyosaki U.

As I take care of my aging mom I realize what a genius move she made holding on to her home. Paid off. She isn't rich and didn't compound wealth the way RK wants you to, but she has a very cheap place to live. I'd have to buy a very big bond to offset the rent on that place so it is certainly an asset on my sheets.

Anyone who feels their home is a liability is free to unload it to me cheap.

[Sclass]

A house is an asset, in that it holds value and that value changes over time.

A mortgage would be a liability, as would the need to have a place to live.

Well said.

[7Wannabe5]

The core liability is the fact that the system that is you will likely disintegrate in short time absent some degree of protection from external elements. Of course, modern material science may have reduced the core liability to the cost of some sort of high-tech snow-suit and the availability of some sort of commons upon which you could sleep without being rousted. Likely there is a high correlation between environmental conditions in commons and likelihood of being rousted. For instance, you wouldn't need the high-tech snow suit in order to sleep in a public park in San Diego, so such facilities are more likely to be degraded in this manner than the National Forests of the Upper Peninsula of Michigan. Also those who do not require easy access to establishments which sell liquor are more likely to find more amiable access to commons.

Anyways, this is all moot, because due to the enactment of the highly exclusionary child labor laws of the early 20th century, if you have children, they will be your biggest liability. My experience was that even if you pack them lunches consisting of tortillas wrapped around left-overs, apples and oatmeal muffins, and you force them to haul around boxes full of used books for sub-minimum wages (in alignment with the exception to child labor law applicable to family owned farm or business), you are still going to be out-of-pocket $66,000 ($250/month X 22 years) easy.

[Dragline]

Going back to the OP, this is good practical advice if you are trying to achieve financial independence, because what ultimately determines that on a month-to-month basis is whether you have enough cash or cash-flow to cover expenses. You are trying to get to a point where you don't need job-related income to do that, so you have to recreate that income some other way.

Tying a lot of money up in a house, boat or car or any other illiquid thing, especially one with a large mortgage or loan, will make it more difficult to become financially independent due both to its lack of cash flow and its expense requirements in the form of mortgage/loan payments, taxes and maintenance.

So while everything you own can be classified as an "asset" in that it has some value in the market place, only those assets that either generate cash flow and/or are liquid enough to be easily sold will be helpful in achieving financial independence.

To think about this more accurately, you would need to separate out the "living and shelter expenses" component of your dwelling from the "illiquid asset" component and then figure out ways to access that illiquid component, which could be done, for example, with a HELOC that you then use to fund other income-generating assets.

[Forskaren]

Tying a lot of money up in a house, boat or car or any other illiquid thing, especially one with a large mortgage or loan, will make it more difficult to become financially independent due both to its lack of cash flow and its expense requirements in the form of mortgage/loan payments, taxes and maintenance.

Yes, owning more house than what you need will drain you both on time and money. That can of course be offset if you win the real estate lottery by buying and selling at the right time.

I know because I had to convince a very close friend of mine that she was a victim of his con. Not that he doesn't have some good tips, but that he sells a lot of material to dumb hopeful types.

Yeah, he can be good for inspiration and getting you start thinking. He seems to be a bit dangerous in some aspects when he start trying to sell, since he is primary a sales person and only secondary an author. Also most of his examples of fast deals generating cash, seem unlikely or at least very hard to reproduce.

[JamesR]

Kiyosaki's definition of an asset as an income producing source, and the corollary argument that your own house is not likely an asset, is a useful rule of thumb to have. It's kind of a good "defensive" way to think about it, instead of getting suckered into buying a house because you heard houses are assets.

Obviously a house can be an asset or a liability depending on how you approach it. It should also be compared with the opportunity cost of investing in an index fund etc. That's what the one percent rule is based on - if the monthly rent is near or higher than one percent of the market price of the house - then it makes sense to buy a house, otherwise it's cheaper to be a renter.

[steveo73]

I think it depends. In Australia our house prices have been on a massive bull market for years and years and years. It's where most of our household wealth is located. As an example my parents bought their house for about $30k and it's now worth close to $2million.

I think the main thing that you miss with owning a house and considering it a liability is that it has imputed rent. So my house could be rented out for say $40k and say we spend $5k on upkeep. That is basically $35k in our hands.

There are advantages to this as well beacuse it's tax free money. If I earnt another $35k I'd have to pay additional tax on that.

[George the original one]

You can also rent out parts of your home (roommates). I knew one guy who did this when he bought more house than he needed and the roommates basically paid his mortgage and meals. That worked very well for about 7 years and then he got married...