This post Rich Dad Scam #6: “Your House Is an Asset” appeared first on Daily Reckoning.
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:
- Business
- Paper
- 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 …read more
From:: Daily Reckoning