Over the past few days I have asked this question to people on Instagram and have gotten a myriad of answers. Some people adamantly believe, Yes, the house that I own and live in is definitely an asset, and then they name their reasons. Others say absolutely not- the house that I own and live in is not an asset. Although they are not against people buying homes, which is an important event in our lives, they don't believe that it's an asset. So, which way do we go? Who do we believe? In a relative world, there doesn't seem to be an absolute answers. It really depends on the situation and we, as investors, have to choose for ourselves. It is PERSONAL finance after all. In the following blog post, I'll share some of the arguments that I have heard for and against the idea of a house being an asset. I leave it up to you, the reader, to choose which perspective works best for your goals.
My entire life I've been told by teachers, family members, finance friends, accountant friends, banker friends, the government, etc, that a house certainly is an asset. A big reason is because you can finally OWN your own living space. You no longer have to pay rent and pay for someone else's mortgage. This is a fair point as ownership is an important part in determining if something is an asset. We put money down, maybe 10-20% towards a mortgage and then slowly, month by month, pay the bank for more ownership of the house. We pay off the principle and interest and 15-30 years later we own our home. It's OURS. And in that 15-30 year time frame the house has also appreciated in value. Maybe it's worth double or even triple what we paid for. In some neighborhoods, mortgage payments are less expensive than rent payments and the value of houses have increased by 7-8 times their worth in 20 years. So, when we sell the house we can make a profit and hence it puts money into our pockets. Also, in that 15-30 year time frame, the house has put a roof over our head through good times and bad. So obviously it's an asset.
Others have argued that a house is an asset because you can live in it for a year, flip it, and sell it for profit. My accounting and corporate friends have argued that THE HOME is an asset and that the mortgage is an offsetting liability. In the long run as you pay off the mortgage you gain equity and once the mortgage is completely paid off you can borrow against the value of your house and put up your house as collateral. With that loan you can buy other assets to grow your portfolio. These all seem like stories that we've all probably been taught through our personal and professional relationships as well as our schooling.
ON THE OTHER HAND, we have arguments against the idea of your home being an asset. Let's see what these folks have to say. Certain individuals look at the entire picture of owning a home, not just principle and interest payments on a mortgage. In some instances, when we include the overhead costs and massive transactional costs of acquisition and sale the investment doesn't seem like a worthwhile commitment. And after including taxes, insurance costs, and interest payments, a house that sells for 1.5x the purchase price could end up being a loss for the owner. (If you need more insight be sure to follow @fire.in.beantown on IG. Check out his "watercooler" story, very insightful). The idea that buying is always good and renting is always bad is not so black and white.
If any of you follow me on Instagram, lately I've been reading Robert Kiyosaki's book, "Rich Dad Poor Dad." If you haven't read it, I HIGHLY recommend it! In it he talks about this topic and his opinion is that an asset is anything that you own that puts money back into your pocket as income. An asset is something that creates CASH FLOW into your pockets as income. Many people, as I have come to learn, don't completely agree with this definition. It's not a traditional definition, but then again neither is Mr. Kiyosaki. So, for him, the house that you own and live in IS NOT AN ASSET, IT'S A LIABILITY, simply because every month it's taking money out of your pocket. Now, although you may not agree with this idea, it's still important to understand and here's why: Many of us may think that once we have a high-paying job and buy a house we're good to go. We've got the best asset that money can buy and everyone around us--friends, family, accountants, the government--is congratulating us and in agreement that YES! this house that you now own is your best investment. You may start to relax and continue with your life. In my humble opinion, this is a grave mistake. If you think of assets in terms of cash flow, you'll realize that the house on a month to month basis is taking money out of your pocket and not putting money into it. No need to panic, but looking at assets from a cash flow perspective reminds us not to rest on our laurels but in fact continue looking for other ways to make income--Dividend payments, Rental income, Buying a business. This forces us to continually increase our financial literacy and keep building more income streams. As a result, over the long haul, we can create multiple income streams so that we are not solely dependent on our job for income.
I am in no way advocating that you don't buy a house or that you quit your day job to start a business. No, go ahead and buy that house and keep your day job, but don't think the journey is over. Don't relax too much and rest on your laurels. Keep growing your asset column so that you can have multiple avenues of bringing cash flow into your pockets. Make your money work for you!
In the next blog I'll touch upon what cash flow is and what different financial statements look like for different types of people. It's super insightful and inspired by "Rich Dad Poor Dad." Anyways I hope this blog post illuminated a different way of looking at assets and the home you live in. Feel free to drop a comment below or get in touch with me through email or instagram! Later Layman Investors!!