Is Your House an Asset?
Rich Dad vs. The Economists
Here’s a quote from one of the most popular personal finance authors of all time:
“An asset puts money in my pocket. A liability takes money out of my pocket.”
– Robert Kiyosaki
That quote from the author of Rich Dad, Poor Dad, was used to argue that your house is not an asset but a liability.
Rich Dad, Poor Dad is one of the best-selling personal finance books of all time, and this idea that your house is a liability has been adopted by millions of people who are fans of Kiyosaki.
In this edition of Calling Financial Bull$hit, I look at the evidence to determine if Kiyoaski is right about your house being a liability.
How economists view housing
Economists are right when they point out that housing plays a unique role in our financial life as both a consumption good and an investment.
A home is a basic need, sometimes a luxury good, and is many people’s most significant expense and asset.
Owning a house is a mixed bag.
Let’s start with the negatives about homeownership, which leads the gurus to refer to it as a liability instead of an asset.
Owning a home is expensive
If you think buying a house is expensive, try owning one.
Here are some of the annual costs you will need to budget for as part of your housing costs.
Mortgage.
Mortgage insurance.
Property Taxes.
Necessary maintenance (such as reshingling the roof or fixing a broken pipe.)
Renovations and upgrades.
Homeowners Association (HOA) or condo fees
Utility bills.
House insurance.
Some estimates put the non-mortgage cost of owning a home in the U.S. at $15,504—That’s the cost before you include your mortgage.
Again, a house is both an investment and a consumption good; it’s not like renting is cheap these days, either. We have a huge demand for housing and not enough of them, so it’s not going to be cheap.
Houses are risker than you think
This is something I covered in detail in my book The Rational Investor, and I am going to borrow some of what I said in the book.
In the book, I ask how risky owning a home is vs. investing in the stock market?
That question was answered in a 2017 paper titled “The Home as a Risky Asset,” written by David Blanchett and published in the Journal of Personal Finance.2
Blanchett found that owning a home was equally as risky as a 60/40 portfolio of stocks and government bonds.
He also concluded that the realized returns of homeowners are often less than inflation when you account for maintenance costs, taxes, and transaction fees that we just discussed.
This is especially true for homeowners who move a lot and pay more in taxes, legal and realtor fees.
A house is the least diversified investment you can make
Buying a home means buying a single unit of:
A broad asset class; real estate.
A subsector of real estate; single-family homes.
Single-family home in a particular country.
Single-family home in a particular state or province within that country.
Single-family home in a particular city within that state or province.
Single-family home in a particular neighborhood within that city.
Single-family home on a particular street within that neighborhood.
Compare that to owning an index fund that invests in nearly every publicly traded company in the world. You understand that owning a home as an investment is the definition of going “all in” on an undiversified investment—which could work out great or terribly.
Okay, now let’s talk about some of the positive aspects of owning a house.
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Houses are illiquid assets
Unlike with an investment in stocks or bonds, you can’t sell a fraction of your house.
If you do want to sell your house, it’s expensive and time-consuming.
Homeownership is very much an all-or-nothing process.
This is a double-edged sword, as you could make the case that the illiquid nature of housing can save many people from impulsive decisions. Another issue I talk about in The Rational Investor is how with a few clicks of a mouse, you can sell your stocks at the worst possible time and wipe out a lifetime of wealth building.
The time and transaction costs required to sell a house provide a cooling-off period where you can rethink your decision.
From a long-term wealth accumulation perspective, the illiquid nature of housing can be both positive and negative—again, it’s a mixed bag.
A fixed-rate mortgage is a form of rent control
Here’s a subtle yet powerful benefit of homeownership that Rich Dad never mentions:
Homeownership acts as a form of rent control.
If you have a fixed-rate mortgage, your housing costs on a year-to-year basis will be relatively flat.
You are not subject to the landlord jacking up your rent when market conditions allow them to do so.
If you can continue increasing your income throughout your career, having a fixed-rate mortgage means that your housing costs as a percentage of your income will drop on a year-over-year basis.
As housing costs as a percentage of your income drops, that frees up more money that you can invest in index funds and build passive wealth.
Forced savings
Every month when you pay your mortgage, a portion of that payment goes to interest, and a portion goes to principal.
Every dollar of principal you pay increases your net worth.
While many people struggle to find money to save for emergencies or retirement, they will move heaven and earth to make their mortgage payments. They do this because they don’t want their house foreclosed upon—not because they value saving—but the reason is immaterial if the result is increased savings.
A paid off mortgage= risk-free, tax-free passive income
Once the mortgage is paid off, your housing costs drop to the level of your property taxes and local maintenance costs.
A paid-off mortgage is like receiving tax-free income from a bond.
If your mortgage payment was $1,500, paying off that mortgage is no different than receiving $1,500 per month in tax-free and risk-free income.
That not only frees up more money for you to invest, but all else being equal, a paid-off mortgage increases your capacity to be more aggressive in your investment portfolio and further increases your wealth.
Final verdict
Is your house an asset?
Yes. Calling it a liability is financial bull$hit.
To understand why let’s apply Robert Kiyosaki’s own logic of an asset needing to produce income and not “take money out of your pocket.”
Do you know what else doesn’t produce income? Gold, Silver, and Bitcoin all of which are assets that Kiyosaki tells people to buy and that produce exactly zero income.
Further, Kiyosaki recommends buying physical gold rather than gold ETFs. Which is funny, because when you buy physical gold, not only does it not generate income, but — much like a house — physical gold has steep transaction costs like storage, commissions, and insurance costs.
By Kiyosaki’s own logic, physical gold is not an asset because it takes money out of your pocket and doesn’t put any money in your pocket.
So, why are gold bricks an asset, but a house isn’t?
If you’re going to make up your own definition of a word like “asset,” you need to apply that same definition in all scenarios.
Homeownership is complex, riskier than many believe, and far from a perfect investment.
It’s also a great way to stabilize your biggest expense in life, create forced savings and eventually create a monthly risk-free income stream when your mortgage is paid off.
Homeownership is complicated. Accept the reality that it’s complicated and involves a series of tradeoffs that are unique to every person.
Tune out anyone who tells you that homeownership is an easy or simple decision.
Read more entries in the Calling Financial Bull$hit series here and consider becoming a paid subscriber to access the entire archive.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.
I agree. Owning a home is an investment. You would need to pay rent if you didn't own. At least with owning you have the chance of recovering something. And Tim's (Dibble) points are excellent. Homeowners are more likely to get involved in local politics, schools, and neighbours.
Very impressed and interested in the perspective, As I live the expat life and until this piece I did not question Rich Dad, Poor Dad
But you have made me curious thank you