Book of Wise Investors

The New York Times best selling personal finance book, Rich Dad Poor Dad, once make a bold claim that your house is a liability, not an asset because he redefines an asset as something that put money in your pocket while a liability is something that takes money out of your pocket. As you shall see below, even based on this definition, your house is still an asset, not a liability. There is actually a reasoning fallacy in Robert Kiyosaki reasoning in his famous Rich Dad Poor Dad book.

Your house is a great asset because not in the sense that it does not put money in your pocket but that it prevents more money from being taken out of your pocket and prevents money from being taken out of your pocket in perpetuity. Robert Kiyosaki argument on why house as primary residence is a liability, not an asset missed out an important point.

Short of sleeping on the streets, you either sleep in your own house over the night or on somebody else’s house by paying a rent, which is money out of your pocket anyway.

Owning your own home is a great investment not because the price is going to increase significantly in the short or long run but because the income from home will provide a good return on your investment. On the surface, it may seemed that paying mortgages leads to an outflow of cash but paying rent is leading to an outflow of cash as well. The difference being that the mortgages payments will stop one day while rent payments will continue forever because you need a roof over your head. He is not wrong in saying that owning a fully paid house still result in cash outflow like property taxes but not owning a fully paid house will be even worse because the rent payments will be substantially higher than property taxes decades later given the general trend in housing inflation.

Let us now look at how home ownership can put money in your pocket. Your house is an asset because it prevents more money from being taken out of your pocket unless the alternative is sleeping on the streets but heck, you need a license to sleep on a street for some country and the license cost money! Yes, by the strict definition of asset and liability, your house takes money out of your pocket but not owning anything and staying in a rented house also take money out of your pocket. The only difference being that all one has to show for after staying in a rented house for over 20 years is rent receipts instead of a house that can sell for a sizeable sum.

When I want a bigger house, I first buy assets that will generate the cash flow to pay for the house.

Robert Kiyosaki, author of Rich Dad Poor Dad

That really depends on the size of income and how much is left after meeting monthly spending because based on current yields as in cash flow from dividends only of most financial assets now, it will be a long time before one can upgrade to a larger house. By the time there is cash flow from assets that to pay for the house, the price may already inflate such that have to spend even more for same larger house.

As we shall see below, owning a house does put money in your pocket, but just that this income is more invisible compared to if you were a landlord, the rental income is the income. To put it simply, assuming that $1800 per month is the rent being paid for a house if did not own that particular house. Then the same $1800 per month is the money that is not taken out of your pocket if you owned that house. To illustrate my point, let us assume some figures to have a better picture.

To determine the home income or money being put inside your pocket as a result of home ownership, constructing an income statement for the house will be a good idea. The home income will get larger each year because rent may increase due to inflation but mortgage payments do not, provided it is a fixed rate mortgage as opposed to adjustable rate mortgage.

Income

Savings from rent $18,000

Expense

Mortgage payment $8,644

Savings from tax $1558

Property tax $1,620

Insurance $255

Maintenance $1460

Home Income $4463

Not considering if the price paid for house is too high or not, we can see that the belief that your house is an asset still holds true in this day and age. The savings from rent is the rent need to pay if were to rent the same or similar house in the same location from a landlord, the bottom line is what you gain if you were to own the house. In addition, technically speaking, the income from home after first month divided by down payment for house is the return on investment and that is usually a substantial amount, a yield one is unlikely to see when investing in other financial assets like stocks and bonds, hence you can see that home ownership does put money in your pocket, not only because it prevent more money from being taken out of your pocket. Take note that this happens independent of whether your house rise or fall in value.

Home income grow substantially after house is fully paid out after maybe 30 years as the mortgage payments become zero while savings from rent is going to be even higher since there will most probably be inflation in rent for the same house 30 years later. This is not considering home ownership allows the breadwinner to buy a life insurance with mortgage protection which pays off remaining mortgage should anything unfortunate happens to him or her and there is no life insurance with rent protection.

Related posts:

1. Why one should not fully pay off mortgage for primary residence
2. Value investing principles in using debt for real estate investments
3. Danger of Rich Dad Poor Dad
4. A more comprehensive analytical framework for analysing asset classes