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.