Rich Dad Scam #6: “Your House Is an Asset”
It seems like every financial “expert” says, “Your house is your biggest asset.”
When I wrote Rich Dad Poor Dad, I said that your house was a liability.
I emphasized they’re expensive and don’t always go up in value.
I wrote “I am not saying don’t buy a house. What I am saying is that you should understand the difference between an asset and a liability… When I want a bigger house, I first buy assets that will generate the cash flow to pay for the house.”
Saying that, I kicked the hornet’s nest. The so-called experts lambasted me.
At the time, the real estate market was skyrocketing. Everyone called me a contrarian, out to sell books. Then 2008 hits, and after one of the worst housing crashes in US history, no one was laughing anymore.
This one is number 6 on the list of Rich Dad Scams—lies that the rich feed to the general population to keep them poor and in the middle class.
Today, I’m going to tell you about the biggest Rich Dad Scams of all—at least in physical size—“Your house is an asset.”
Money In, Money Out
Your financial planner, real estate agent and accountant all call your house an asset.
But in reality, an asset is only something that puts money in your pocket.
If you have a house that you rent out to tenants, then it’s an asset. If you have a house, paid for or not, that you live in, then it can’t be an asset.
Instead of putting money in your pocket, it takes money out of your pocket.
That is the definition of a liability.
This is doubly true if you don’t own your home yet. Then it’s the bank’s asset—it’s working for them, but it’s not earning you anything.
So What Is an Asset?
In business terms, assets are your pros and liabilities are your cons. You need assets to offset your liabilities.
Once you get away from the Rich Dad Scams, it’s easier to think in those terms, to think like an entrepreneur.
But what exactly are assets?
The simple definition of an asset is something that puts money in your pocket.
This is accomplished through four different categories, one of which is real estate. When I say real estate, I don’t mean your personal residence, which, again, is a liability.
What I mean is investment real estate, which is a great investment because it puts money in your pocket each month in the form of rent.
There are three other primary assets:
- And commodities.
If you are an entrepreneur or a business owner, your business is an asset.
Paper assets are stocks, bonds, mutual funds, and so on.
And commodities include gold, silver and any other physical resources like oil and gas.
My wife and I started out making our money in real estate, putting our money to work in properties that we could rent out to see ongoing returns. After that, we diversified, so now we have some money in all of four of these asset areas.
When your broker tells you to diversify in, say, mutual funds and stocks of varying scope…
That isn’t really diversifying. Because if the market crashes, you get hit on any mutual fund or stock you have.
Invest for Cash Flow, Not Appreciation
The Rich Dad Scam that your home is an asset was prevalent when I first wrote Rich Dad Poor Dad.
That was in 1997, and everyone’s home values were climbing.
It was easy to assume that your house was an asset because it was potentially making money for you in the long run through appreciation.
People bought into the scam hook, line, and sinker, taking out home equity loans to buy cars, vacations, TV’s, and more.
Then in the Panic ten years ago, those same people were so underwater that foreclosure rates rose to a peak of 10%. The foreclosure rate this year is 0.5%, to give you context.
When the panic struck and we saw the aftermath playing out in front of us, most people weren’t saying their home was an asset if they were part of that staggering 10%. But now, we are back into a booming real estate market…
A lot of Americans got a fast, ugly financial education when the real estate market turned south. They realized very quickly that their homes were not assets.
Your House as a Retirement Plan?
Of course, there is also the notion that buying your own home is a cultural right of passage.
Many people dream of the day when they get the keys to their own front door, imagining the joy that will come with the monumental achievement of taking on hundreds of thousands of dollars in personal debt.
I’m only being slightly tongue in cheek.
The reality is that many people desire to buy a home because they think of it as a good investment. And in many cases, homeowners expect their house to be a big part of their retirement plan.
For instance, published just last year by Rob Carrick for the Canadian “The Globe and Mail,” “In a recent study commissioned by the Investor Office of the Ontario Securities Commission, retirement-related issues topped the list of financial concerns of Ontario residents who were 45 and older. Three-quarters of the 1,516 people in the survey own their own home. Within this group, 37 per cent said they are counting on increases in the value of their home to provide for their retirement.”
The sentiment I’m sure is the same here in the US, and in many places throughout the world.
Lenders in ARMs
This is why I’m not surprised to read that now that housing prices are going up (6.9% year over year in August 2017), risky mortgages have come back into style.
As CNBC reported around the same time, “The number of adjustable-rate mortgage originations jumped just over 40 percent from the first quarter of this year to the second, according to analysis by Inside Mortgage Finance.”
For those needing a refresher, an adjustable-rate mortgage, or ARM, allows potential homeowners to purchase more expensive houses by having lower interest rates than a traditional 30-year fixed-rate mortgage. ARMs are usually offered at one, three, or five years, meaning the interest rate will adjust to market rates after that period. In essence, it’s betting that interest rates will be as low or lower down the road…and that you’ll be in a better financial position to pay more, should the need arise.
You might not be surprised to hear that defaults on ARMs were a big part of why we faced the great recession from 2008 to 2011. And while there are new safeguards in place to ensure that ARMs aren’t given to subprime borrowers, there is something of a frenzy that is building around buying homes in the US again. This, again, is because people inherently think they are good investments. After all, don’t housing prices always go up?
That’s what you’d believe if you followed most conventional financial advice.
Where Bad Financial Advice Comes From
My rich dad believed that people struggled financially because they make decisions handed down from parent to child, and most people don’t come from financially sound families. He often said that most bad financial advice was handed out at home, which is one reason I am an advocate for financial education in the home.
Of course, for most people, while financial advice starts in the home with old rules like go to school, get a good job, save your money, buy a house, and invest for the long term in a diverse portfolio of stocks, bonds, and mutual funds; it doesn’t end there.
Many people also take the bad advice their parents give them and compound it with bad advice from financial advisors as they get older.
Many financial advisors will tell you that your house is an asset, but that is untrue. The fact is that when financial advisors say this, they are not really lying, but they aren’t telling the whole truth either. While your house is technically an asset, they just don’t say whose asset it really is.
Your House Is Not Your Asset
If you look at a bank statement, it becomes easy to see just who gets cashflow from your home—the bank.
Most people do not own a home… they own a mortgage.
Those who are financially educated understand that a mortgage doesn’t show up in the asset column on the financial statement. It shows up as a liability. But it does show up on your banker’s balance sheet as an asset as you pay the bank interest every month.
Remember my rich dad’s definition of an asset, “Anything that puts money in your pocket. A liability is anything that takes money out of your pocket.”
Just look at your bank statement every month and you’ll see that your home puts no money in your pocket and takes a heck of a lot of it out. This is true even if your house is paid off. Even after you pay off your mortgage, you still have to pay money every month in the form of maintenance costs, taxes, and utilities. And if you don’t pay your property taxes, guess what can happen? The government can take your home. So, who owns your house really?
Don’t Buy into a Lie
Am I saying don’t buy a house? No. I own a home myself, but I didn’t buy it as an asset or think of it as an investment. I bought it because I wanted to live in it and was willing to pay for the privilege of doing so.
Could it appreciate in value? Maybe. But it could also lose me money in the end. I don’t really care.
What I am saying is don’t buy a home and think of it as an asset or investment.
That’s just simply a lie. Unfortunately, that lie continues to perpetuate here in the US and around the world. And until it’s finally put to rest, we’ll continue to see booms and busts in the housing marketing.
The difference between my poor dad and my rich dad was a financial education. And that’s not a classroom and books education, that’s a nuts-and-bolts, street-smart education; a way of looking at money that is true and that works, not just what the rich want you to believe.
I fear a booming market. I fear that what happened before will happen again sooner than everyone thinks.
So play it smart. You can make money in any market.
Rather than invest for appreciation, my rich dad taught me to invest for cash flow and to treat appreciation like icing on a cake.
I encourage you to do the same.
Editor, Rich Dad Poor Dad Daily