There is quite the debate (Canadian Capitalist and InvestingIntelligently) going on about whether or not your primary residence is an asset or a liability.
If someone wants to open up a dictionary and look up the definition of ‘asset’, I am sure that you will find a home there. I am also sure that in the accounting sense, a home would be listed on your balance sheet as an asset. No argument there.
But from a financial sense, I think of my primary residence as a liability. And yes, I first came around to this way of thinking after reading one of Robert Kiyosaki’s books.
To me, a financial asset should make me wealthier. GICs and bonds generate interest; stocks appreciate and pay dividends (hopefully!); rental properties produce rental income. Those are all financial assets to me.
“But Average Joe, a home appreciates!!” Yes it does. But my theory is that, if my house goes up 30%, great! Unfortunately, probably all the houses in my city have appreciated roughly the same amount. So if I sell my home, I will just have to hand over that 30% appreciation to the person I buy from. So really, I am no better off.
I could downsize. Sure. But I am still paying 30% more for that smaller house. I could move to a different city that has only appreciated 10%. Well then, yes, I will have that extra 20% in my pocket.
As for being a liability, my house is definitely a financial drain. I have to pay property taxes, heating, electricity, water, renovations, and all that other stuff that goes into running a home. Then my wife wants to add fancy decks, patios, fences and flower gardens!! It all costs money. If I lost my job, my house would quickly drain my savings! And that is not even including the mortgage.
Scary stories: Boomers (having been burned by the Tech Bust) moved their money into real estate. However, instead of buying income producing property, they have just kept upgrading their homes. Boomers are living in some very nice, very expensive homes. However, when it comes to retiring, what then? Unfortunately, you can’t buy a loaf of bread with a big beautiful home.
No problem. Boomers will just sell their homes. Sure, they can do that. But if this happens to a lot of boomers, there will be a lot of high end homes on the market. These boomers might need their cash fast, so they will have to sell lower. And maybe those of us trailing behind the boomers won’t even want those really nice homes anyways!
I realize we all need somewhere to live. It would still cost me money to live somewhere. A place to live is a necessity.
Is a home an asset? Begrudgingly, yes. But man, it sure FEELS like a liability!
9 users commented in " The Asset with Liability Written All Over it "
Follow-up comment rss or Leave a TrackbackI see Kiyosaki’s name popping up everywhere I see this debate. If people would stay away from this lunatic they would be a lot better off.
““But Average Joe, a home appreciates!!” Yes it does. But my theory is that, if my house goes up 30%, great! Unfortunately, probably all the houses in my city have appreciated roughly the same amount.”
You can apply that argument to your investments too. So what? I don’t see the point here. So the fact that your house doesn’t really get you anywhere (compared to everyone else) and that you are “no better off” because of your house means that your house is somehow a second-class asset, or even worse, a liability? I think Kiyosaki has brainwashed people into thinking that real estate is some magical money tree (correction: writing books is a magical money tree), and if yours (ie. your home) isn’t (ie. not generating income, yada, yada, yada) then it’s a liability. Well it’s not, and everything Kiyosaki says by the way is, as Ricky Gervais would say, complete bollocks!
“As for being a liability, my house is definitely a financial drain. I have to pay property taxes, heating, electricity, water, renovations, and all that other stuff that goes into running a home.”
Many assets incur expenses. Investments incur management expenses, cars incur gas, insurance, and repair expenses, a boat incurs mooring expenses. That doesn’t make them liabilities.
The comment I made about the appreciation of my house was really to the effect that I haven’t gained anything by having my primary residence increase in value.
A friend of mine bought a small, attached home. It went up like $30,000 within a couple of years. He was ecstatic. What did he do? He bought himself a bigger home. Guess what? That bigger home had also appreciated as much (if not more) than his original home. He could have bought that bigger home cheaper if he had bought it first. So really there was no gain. He didn’t walk away with that extra $30,000. All he did was hand it to the next person he bought his home from.
I see your point about a stock being similar. If I never sell my stock, have I actually earned anything? Makes me think back to all the ‘Nortel millionaires’ we had running around Ottawa during the Tech Boom. Unfortunately, most of them held on to that stock, and they are no longer millionaires today.
As for cars, those are even tougher. They cost a fortune to run, and if you hold them long enough, they become completely worthless! Hmmmm, that can happen to a stock as well.
This is definitely an interesting topic. I could probably work BOTH sides of the debate! Like I said, I do classify homes (and cars) as assets.
As for Kiyosaki, talking about a home as a liability really made me stop and think. And any time you do that, it is a good thing.
>> If I never sell my stock, have I actually earned anything?
There are 2 ways to profit from stock ownership. I love dividend stocks, don’t like baseball cards!
I’ve never read kiyosaki’s books, maybe I should he seems to stir a wide debate.
I see it like this. Owning a home is a liability…the home itself is an asset.
BTW…why do we include homes in net worth calculations? I would be much happier(and financial secure) with a $250,000 home and $750,000 in the bank than owning a $1,000,000 home and no savings. Same net worth of $1,000,000 but surely one is much better than the other. yes yes, you could sell the home and have the cash blah blah blah, but you don’t struggle to get a $1,000,000 home just to sell it. your home is always a (necessary) impediment to financial freedom.
Dave: Sure a car (and boat) is an asset in the net worth statement, but owning one is a liability because over time they depreciate and costs a ton of money to maintain. The key difference between an investment and a car is I expect an investment to grow over time, but a car is guaranteed to cost you money over time.
A house is not as clear cut as a car. It generally appreciates over time, keeps pace with inflation and provides value in the form of shelter. Joe is making the point that a house (even a fully paid one) could easily become a liability if the owner cannot afford pay property taxes or afford the huge costs involved in maintaining a house.
CC: depreciation is actually an expense drawn on the asset. So you would have a positive number going into an expense account called “depreciation” and a negative transaction called “asset depreciation” on the asset itself. But actually a negative asset is like a liability so in that sense I guess the depreciation is like a liability! But it would totally not make sense if you looked at your accounts after a few years, you would see an asset (at it’s original price you paid) and a liability (equal to the amount of depreciation). Rather than an asset showing a present value which incorporated the depreciation.
“I expect an investment to grow over time”
A bit of an assumption there?
“Joe is making the point that a house (even a fully paid one) could easily become a liability if the owner cannot afford pay property taxes or afford the huge costs involved in maintaining a house.”
I can’t agree with you there. It just means your income isn’t large enough to cover the expense. Re-mortgaging might help.
James said: “why do we include homes in net worth calculations”
There’s all sorts of different measures. You could easily just leave it out. Companies classify their assets in varying degrees of liquidity don’t they?
Of course, I expect my investments to grow over time. Otherwise I wouldn’t be investing! Investing by definition is putting up money today in the expectation of having more money tomorrow.
“I can’t agree with you there. It just means your income isn’t large enough to cover the expense. Re-mortgaging might help.”
How does remortgaging help? If I can’t carry the expenses involved in owning my home, I can either get into debt or sell and move to a lesser priced home. Getting into debt is precisely how a home could become a drain on the cash flow.
When I said:
“If I lost my job, my house would quickly drain my savings! And that is not even including the mortgage.”
All I meant to say was, unlike a stock or GIC (which costs me no money to maintain), a house would continue to cost me money. It doesn’t put my money directly in my pocket by just owning it. And if I lost my job, of course my income wouldn’t be big enough, it would be zero at that point.
It is funny that we all agree it is an asset, yet the debate goes on.
Really makes you think.
Leave A Reply