House: Asset or Liability?
I just finished hearing the audiobook of Robert Kiyosaki’s Rich Dad Guide to Investing. I must say it is really really a very good audiobook and I’ve been learning a lot from it. A lot of thanks to Richard who is an avid reader of this blog who gave me the audiobook. In this article, I will write what I have learned about your house or your home as an asset or a liability.
Is you house an asset or liability? This is also the topic in one of the forums that I visited. We are used in the traditional accounting principles that a house is considered as an asset. When you are making a balance sheet where assets and liabilities are listed down, a house falls under the asset column since an asset is defined as anything that has value. And of course, a house has value.
Well, according to Kiyosaki, an asset is anything that flows CASH IN our pockets and a liability is anything that flows CASH OUT of our pockets. Now, how do you classify a house? Is it an asset or a liability? Kiyosaki said it would depend on the INCOME STATEMENT and not on the balance sheet.
In another video that I watched, Kiyosaki said that if he stopped working, ASSETS will FEED him while LIABILITIES will EAT him.
If a house provides rental income more than the expenses associated in owning it such as maintenance costs, utility bills, real estate taxes, and insurance costs, then a house is considered as an asset since it flows CASH IN our pockets. However, if your house has more expenses than income, then it is a liability.
Let’s look at the following example to illustrate it more clearly. Suppose you own a house that has a tenant renting it at 1,200 per month. As an owner, you are paying the real estate taxes, insurance costs, and some maintenance costs with an aggregate amount of 1,000. In this case, your house is considered an asset because it has a NET INCOME of 200 which provides CASH IN your pocket.
Now, as an educated investor, you should know the difference between an asset and a liability. Kiyosaki continued to tell that an educated investor does not look into one financial statement alone but to at least two financial statements.
When your bank told you to avail of a home loan to own a house and they keep on telling you that your house is the best asset that you will have, yes it is the best asset but not yours. It’s the BANK’s ASSET since you will keep on paying the mortgage for years with interest to them. You will end up paying double or even triple the original value of your house as you pay your mortgage and interests for 10, 20 or even 30 years. What’s worst, if you were not able to pay them, then they will foreclose it and you will end up paying for nothing. It provides CASH IN to the pockets of banks! However, it is your liability. It flushes CASH OUT of your pocket.
So one’s asset is someone else’s liability and one’s liability is someone else’s asset. We must look on to the income statement and not on the balance sheet in determining whether our house is an asset or a liability.
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January 5th, 2009 at 7:10 pm
Tom Humes
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January 5th, 2009 at 10:31 pm
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January 5th, 2009 at 10:41 pm
@ Jay: It took me less than 2 months to have a Pr of 1. I am also interested on what accountants will comment about this post. Any accountants there? =)
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January 6th, 2009 at 1:31 am
I am a member of one of the business community http://www.CreateAbundance2020.com which is an affiliated site of http://www.RichDad.com.
Create Abundance Business Community compose of group of Businessman and Investors who follows Robert Kiyosaki’s principles. If you wouldn’t mind, is it ok with you to add your blog link to my links on my blog at rhyanmiraflores.blogspot.com so that I can have updates everytime you post? Can you also include our Create Abundance Business Community: http://www.CreateAbundance2020.com website? In return, I will post all your links to our blogspot accounts. More power and thank you.
Best regards,
Rhyan Miraflores
http://www.CreateAbundance2020.com
http://rhyanmiraflores.blogspot.com
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January 6th, 2009 at 4:16 am
Kiyosaki and Sharon Lechtern???(his partner) really tried to simplified it. In accounting, that is form over substance. (cash over value). So what is cash if it has no value. What is 1,000,000 pesos or even US$1,000,000 dollars if it cannot buy you shirt. Therefore, substance over form should always prevail, which is one of the principle of accounting.
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January 6th, 2009 at 12:24 pm
P.S. I’m an avid reader of your blog! Keep posting!
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January 6th, 2009 at 4:30 pm
@ Jayson: Thanks.
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January 6th, 2009 at 7:21 pm
The use of debt funding (a mortgage) to buy the property does not change the property itself from an asset into a liability. How can it?
The position can be illustrated very clearly by contrasting the positions of:
1. a person with no assets or liabilities at all; and
2. a person whose only asset consists of a self occupied unencumbered home.
If you beleive that the home is a liability (because you have to pay outgoings) you would have to conclude that person #1 has a higher net worth that person #2 - which is obviously nonsense.
Another way of looking at the issue is to consider other instances where there is negative cash flow associated with an asset - a property development, a business start up, a mine development. If Kiyosaki is right then all of these are liabilities rather than assets. Again, that would be obviously wrong.
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January 6th, 2009 at 7:25 pm
Thanks a lot for sharing your views.
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January 6th, 2009 at 9:31 pm
There are some major flaws in this logic. By your logic no one would ever buy a house. How about when a mortgage payment is cheaper than paying rent? By your logic the house is a liability, but at least the house has resale value and you will end up getting some of your money back.
Plus, should never look at where you live as an asset or a liability, or even an investment for that matter. It’s a necessity, you HAVE to pay money to live somewhere. Also, as a general rule of thumb if you are going to be living in a house in order for it to be financially smart you need to be staying there at least 7 years.
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January 6th, 2009 at 10:02 pm
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January 7th, 2009 at 8:53 am
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January 12th, 2009 at 1:28 am
Suugest we organize cashflow 101 clubs and promote financial literacy in another level.
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April 20th, 2009 at 9:22 pm
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http://www.brazencareerist.com/2009/01/05/house-asset-or-liability
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April 20th, 2009 at 10:08 pm
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May 13th, 2009 at 8:16 pm
You can learn more about it when you read his book. He teaches the power of leverage. e.g how to buy a house or build a business with little or zero cash at all.
And I would believe in his principle because his already a multi-millionaire. He knows that from his experience and he already has proved of it.
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August 6th, 2009 at 6:03 pm
i couldn’t even tell my uncle to leave!
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August 6th, 2009 at 7:22 pm
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In your case, why did you buy your grandma’s ancestral house? Is it because of its sentimental value to you? Do you have your own family in which you are supporting? If I were in your case, I’ll tell my uncle to find a source of income.
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October 21st, 2009 at 6:47 pm
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