Tuesday, July 17, 2012
IS YOUR HOME AN ASSET?
Robert Kiyosaki, the financial advisor who wrote the highly influential and successful book Rich Dad, Poor Dad argues that your home is not an asset, though many people think it is. I disagree with him.
Kiyosaki defines an asset as something that contributes to cash flow, rather than soaking up your income. He acknowledges that a property that you own and rent out is an asset. What if the costs exceed the income? It becomes a liability, he says. What if the appreciation in property value offsets the loss? That begins to sound like an asset. An asset is something of value. Thus, a house is an asset, which may or may not appreciate over time and which incurs some carrying costs, such as taxes and repair. Your mortgage is a liability, with your house as the collateral on your loan.
Imagine you have a pound of gold that you store in a safety deposit box, paying a small annual fee for storage, a net cash flow loss. Would it make sense to argue that this is a liability rather than an asset? Of course not, unless the annual costs became prohibitive and unavoidable.
A house you own outright is like that bar of gold, with some substantial carrying costs. Often these costs are roughly proportional to the house value or price, so that owning more house than you need can lead to unnecessary cash flow loss, but if you inherit a very valuable home, do not turn it down because Kiyosaki would tell you your liabilities have increased.
Cash flow is important, but wealth is even more fundamental. Owning gold or a house represents wealth.
Similarly, owning an insurance policy, even one for which the premiums exceed the dividends is owning an asset.