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In the Rich Dad, Poor Dad series, Robert Kiyosaki asserts that a home is a liability not an asset. This is not correct accounting, but it may be a valid point.
Webster’s Dictionary defines an asset as the resources of a person or business, including cash, inventory, real estate and other items of value. Another definition of assets are items that are cash or can be converted to cash.
A personal home certainly seems to fit both of these definitions. It is real estate and can be converted to cash, even though it may be difficult.
The Accounting of Rich Dad, Poor Dad
Robert Kiyosaki is the well-known author of the popular Rich Dad, Poor Dad series, where he offers investment advice through the stories of two father figures.
One of the more famous statements in the books is that a personal home is not an asset, but is a liability. Liabilities are the opposites of assets, and are identified as items owed to others.
Based on the definition above, in the strict accounting sense, a personal home is an asset. How does Mr. Kiyosaki reconcile the disparity?
Revenue Producing Assets
Mr. Kiyosaki’s primary philosophy, in summary, is that the rich own businesses or real estate that generate income, rather than work as an employee. He considers these items as assets.
Therefore he only considers things that produce income as assets, narrowing the accounting definition. A personal home does not generate income (in the simple sense) so it is not an asset.
Many homeowners, however, do carry mortgages on their personal homes. Mortgages, by any definition, including Mr. Kiyosaki’s, are liabilities. His Rich Dad only considered one side of the equation.
Is a Home an Income Producing Asset?
In the strict sense, a home does not generate income, but it can provide a financial benefit:
- Since a person is likely to incur housing costs, part of the payments on a home reduce the mortgage and increase the owner’s value in the house. On the negative side, homes require maintenance, and much of the payment is used to pay interest on the mortgage.
- There is the potential of increase in the value (selling price) of the home, but that can only be realized when the home is sold. Even then, there may not appreciation, and homes purchased at the top of the market can depreciate in value.
There is also the possibility of renting out part of the home, but for most owners, the value of a home is in possible appreciation, not income.
Accounting Treatment vs. the Real World
The accounting definition would clearly lead one to believe that a home is an asset, there are associated liabilities and expenses. Mr. Kiyosaki narrows the definition to make a point; that the rich depend on income producing assets in order to remain rich.
The copyright of the article Is Your Home an Asset or Liability? in Accounting is owned by James Hutchinson. Permission to republish Is Your Home an Asset or Liability? in print or online must be granted by the author in writing.
Comments
Jan 8, 2009 11:56 AM
Guest
:
It's all a matter of semantics... A home IS an asset, but it's the BANK'S
ASSET, not the homeowners (unless it provides a cash flow).
I've
studied Kiyosaki intensively regarding the controversy of defining assets
and liabilities. While it's counter-intuitive to poplace thinking, I
believe Kiyosaki is making an excellent point about how wealthy people
leverage money for passive income not capital gains. The middle class
naively believe their home is an asset because they think in terms of a
home's equity or capital gains value. The truth is that money found in
equity is merely an OPINION of a home's value. There is no equity until you
SELL a home. That's the only way you'll know the market value.
Here are three scenarios I hope illustrate that your home is not an
asset, but rather a liability:
* You will know your home is a
liability if you are unable to produce the annual county tax bill (a tax
lien default will take your home).
* You will also know your
home is a liability if you are unable to produce the mortgage (as the bank
will repossess your home, bankruptcy may follow along with a lowered credit
score to make finding rental housing nearly impossible).
* And
finally, you will know your home is a liability when you default on the
insurance and your property is not livable after a catastrophe and yet you
still have to pay the mortgage and pay for a new place to live.
The middle class may argue that a rental may have similar liabilities --
for example the tenant doesn't pay rent, the tenant damages property. Well,
a good investor takes the vacancy rate into account and calculates cash
reserves for such along with tenant damage, maintenance costs, property
management expenses, taxes, and insurance. Quite simply, the rental value
exceeds these costs along with the mortgage payment. Investing doesn't need
to be risky. For the wealthy it's a calculated risk.
In summary,
the middle class look at a home as an asset because they concentrate on
capital gains. The difference is that the wealthy use capital gains ONLY as
a means for securing more passive income.
To truly understand
Kiyosaki is to understand financial statements and cash flow as a means to
wealth creation. Only then will you realize that a home is not necessarily
an asset.
M.C. Nygard
----------------------
M.C.
Nygard is a former eBay platinum powerseller, currently an entrepreneur
buidling a portfolio of passive income. Visit her site at
www.cashbackatebay.com
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