Monday, February 25, 2008

Why My House Is An Asset

Ever since Rich Dad, Poor Dad by Robert Kiyosaki came out, there has been some confusion about the definition of asset and liability. Flexo explains this succinctly on this comment at Lazy Man and Money
An asset is something you (can) own. A liability is something you (can) owe. Kiyosaki wants to make up his own definitions, but a “Kiyosaki asset” is simply a cash-flow-generating asset and a “Kiyosaki liability” is an expense-generating asset. It’s one thing to say that expense-generating assets should be *treated like* liabilities, i.e. eliminated wherever possible, but it’s another thing to say they *are* liabilities.
I admit, I read Rich Dad, Poor Dad and it changed my whole perspective on how to approach money. I love the idea of money working for me rather me working for money. How revolutionary!

In Kiyosaki's opinion, your residence is a liability because it generates expenses. There's the mortgage you have to pay every month, there are home repairs, maintenance, and property taxes. That's quite an outlay. Depending on the market you are in, your home may be appreciating in value but that equity is not liquid. You cannot access it unless you sell the house or take out a loan or line of credit.

Even if you don't go by Kiyosaki's definition and refuse to call your house a liability, it's still a pretty clunky, cumbersome asset. Is it worth all the work?

I bought a house two years ago with the sole purpose of decorating. I had been renting for my entire adult life and I was tired of white walls and boring kitchens. I wanted to get creative. Oh yes, my home buying decision was no walk down investment lane. But, being the frugal person I am, I did my research and got a great deal on my property and on my renovations.

As a renter I paid about $550 a month for a 500 sq foot apartment. I had to step out into the elements to do laundry. I had to climb up and down stairs to get to the parking lot.

Now I pay about $850 a month for a 1200 sq foot house with a yard and a private driveway. I have all the creative freedom I want. My laundry is on the second floor right next to my bedroom (!!!!!!) and my house is beautiful.

Over half of the $850 is tax deductible because it covers interest and property taxes which saves me about $100/month. That leaves me with an average monthly cost of $750.

I live in a part of the the country that totally escaped the housing bubble. In my neck of the woods property appreciation just about keeps up with inflation. A home is not a nifty retirement savings vehicle here.

So What Makes My House An Asset?
According to the standard definition of asset, my house is one simply because I own it (not fully yet because I have a mortgage, but I do have some equity in it). But my house is also an asset by Kiyosaki's definition because I found some roommates. I got roommates who cover the remaining $750 worth of payments. There are still some housing expenses that I have to pay but I am still way ahead of where I was when I was a renter.

I call my house an asset because it generates some income for me that has improved my bottom line. I like those kinds of assets. Money working for me.


Kim said...

I just don't see how a house could be a liability. I don't have a mortgage and it is what saves my new worth number.

PiggyBankBlues said...

the carnival of money stories is up!