Is a house an asset?

Question

Intro: I'm 21 and I do not know anything about personal finance. I want to start learning because I strongly believe that this is a very important and necessary attribute to learn.

I have read Robert Kiyosaki's book Rich Dad Poor Dad which I think is pretty good but there were a few ideas which I thought were risky or strange. The one that shocked me most was the idea that a house, a flat or an apartment that you live in and pay for for a long time will eventually be yours and you can be rented or sold but would not be an asset. I quote (page 48):

Today, I am still challenged on the idea of a house not being an asset. And I know that for many people, it is their dream as well as their largest investment. And owning your own home is better than nothing. I simply offer an alternate way of looking at this popular dogma. If my wife and I were to buy a bigger, more flashy house we realize it would not be an asset, it would be a liability, since it would take money out of our pocket.

He then writes

So here is the argument I put forth. I really do not expect most people to agree with it because a nice home is an emotional thing. And when it comes to money, high emotions tend to lower financial intelligence. I know from personal experience that money has a way of making every decision emotional.

My question is, do you consider a house to be asset?

Answer 1

Is a house an asset?

Assets are simply owned property with value. My computer is an asset, my car is an asset, my house is definitely an asset.

People who say houses aren't assets are trying to sell a different definition of asset, for example, this Rich Dad character says: "The simple definition of an asset is something that puts money in your pocket."

That definition is at odds with accounting standards and at odds with most common definitions. Assets don't have to earn you money to be assets. A house is an asset, the home mortgage is a liability.

While his definition of asset is questionable, the heart of his position is really that houses (primary residences) aren't good investments. The fact is that sometimes homes are fantastic investments, and sometimes they are not. There is no blanket answer. For many people home ownership is a key part of retirement, but there are markets where it is better to rent than to buy.

Yes, living costs are overhead, but his discussion seems to ignore how much you'd pay in rent over the same period, if you could live free in someone else's house then obviously home ownership has little draw, but in many places owning is cheaper or equivalent to renting, and over a long term will be cheaper than renting. I'd argue that a home purchase should be evaluated as an investment, and I agree that you shouldn't consider appreciation a guarantee (just as you shouldn't assume your HVAC system won't die on day one).

Answer 2

TL;DR: a house is an asset but not really an investment.

There is an argument that houses are assets, so no amount of money spent on a house is ever wasted. After all, you can always sell the asset.

I describe this as an argument, because I think it is deeply flawed. Consider:

1. The market may crash, and you can't get the original purchase price of the house.
2. That may occur when you are having cash flow problems, so you can't support the mortgage either. The bank will make you sell the house, possibly by foreclosing and selling it themselves.
3. Houses wear. In order to keep the house at the same value, you have to put money into it. Otherwise, the house will decline in value.
4. More expensive houses have higher expenses. Taxes are higher directly. Utilities are often higher with the size of the house.
5. If your job moves, you want to move with it. In that case, you either need to sell the house or find ways for it to offset its costs.

So you can't always sell the asset (the house) for what you paid. You can waste money on a house.

That said, there are many circumstances in which buying is better than renting. In general, a rough rule of thumb is that if you are going to be in a location for more than five years, you are better off buying than renting. This is because the equity that you build up is itself valuable. But that value takes time to outweigh the transactional costs of buying and selling a house. Thus the five years, which is a general estimate of how much time it takes to build enough equity to overcome things like transfer fees.

The point that the author was making is that you are better off buying or renting the cheapest house that you can stand rather than the most expensive that you can afford. If you buy the most expensive house, you don't have money left over to do all the other things that he wants you to do. You are better off taking that money and investing it in other things, possibly even real estate. That way your wealth will increase.

He is redefining the meaning of asset, which in accounting is a thing of value. Rather than using the typical accounting definition, he wants to define asset as something that can give you income. That's more typically called an investment. So we could alter the wording to say that a house in which you live is not really an investment unless:

1. You are improving the house while living there.
2. Or house values are increasing so much, that it doesn't matter.

The first is a lot of work. The second tends to be transient. Eventually house prices stop increasing like that and may even decrease.

Another issue is that if you are living in a house, it may be difficult to take advantage of the higher price. Sure, you can move out. But you are doing so in a seller's market. Where will you get a replacement house? With perfect timing, perhaps you move into a rental and sell the house. You rent for two years, until the market crashes. Then you buy a new house. But what if it's five years until the market crashes? Or what if you wait too long and the market crashes while you're still in the house? Or what if something is happening such that it is inconvenient to move from the house at the time when you could do it?

If you instead buy a more modestly priced house in which to live, you can invest the rest of the money. You might even buy another house, which you can rent out.

Now think about how this changes how you can take advantage of high prices. You can sell the rental house whenever you think it's overvalued. Now, wait too long, you're stuck with a rental instead of cash. But you're still making money from the rental. If you sell too early, you just lose out on some gains. The other way, you lose the gains plus take the hit from extra rental costs. This way, you don't rent. You own your house. This way is much less risky than trying to profit off the house in which you are actually living.

You don't have to invest in another house. You could diversify by investing in stocks and bonds instead. The returns won't necessarily be as good, but the risk is lower.

Another possibility is a smaller mortgage. If you buy a more modest house, your mortgage costs less. Less of a loan is a guaranteed return.

Buying a more expensive house increases your costs. It may be possible to recover that when you sell, but it's not guaranteed. It is safer to buy two houses for the same price. Then you can sell one without having to replace it. It is safer still to minimize the amount of mortgage you take out and to invest left over money in places other than real estate. Of course, with lower risk the potential reward is less.

The advice that you should live in the cheapest house you can stand is good financial advice. It leaves you with more money to invest in other things.

Answer 3

When most people buy their first house, they don't have the full purchase price (plus all the other costs associated with the purchase) available in "cash". Most people have to take out a mortgage for their first house, and it's usually most of the value of the house (sometimes 90% or more). That mortgage is an expense; at the start of a (for example) 30 year amortization, almost the entire payment is interest; only a tiny amount goes to reducing principal.

One might argue that such a home, on which you are paying a mortgage, property taxes, utilities, and maintenance costs is not an asset to you, because if you had to sell it, you'd potentially net nothing once you've discharged the mortgage and paid the real estate fees and all other closing costs.

On the other hand, the longer mortgage payments are being made, the more principal is being reduced (and the greater the proportion of each payment goes toward principal). Also, most real estate appreciates over time; the selling price at some point in the future will be greater than the purchase price. These two factors create equity in the property; that's net real money when the property is eventually sold.

Also: when you rent the place where you live, that's money entirely gone, never to come back. Remember that a landlord has to pay all the same costs as any homeowner (perhaps also including finance costs on the property) and will pass all those costs on to the tenants (plus a little extra for profit). As a homeowner, you can build equity in your home.

Kiyosaki laid out a scenario that for some people will be a finance trap. It can best be summarized as "living beyond your means". Trading up every few years and starting a new 30 year amortization is a flawed approach to financial planning and home buying - nobody should ever do this. Let's say a person bought a house in 2010 and took out a mortgage with a 30 year amortization to pay for it. If that person kept making those payments for 30 years, come 2040, the mortgage would be paid in full. If that person decided to trade up in 2015 (after 5 years), the wise thing to do would be to mortgage for no more than a 25 year amortization, so that it will still be paid off in 2040. Keeping that rolling 30 year horizon is a good way to get into deep debt from which you can never get out.

There are two kinds of debt: wise debt and foolish debt. Wise debt is taken on for worthwhile things, with a plan for how to pay it off, just how much it will end up costing (seeking to minimize this), and exactly how long it will take; it is almost certainly secured by something tangible (like a house), and will be obtained at a low interest rate. Foolish debt is taken on to pay for all manner of stuff with no plan for how - if ever - to pay it off, and is often at interest rates just short of usury. People who buy stuff because there is room on at least one of their credit cards often feel like they are living the high life until the bills come due on all that foolish debt.

I bought a modest townhouse in 1994. I took out the most aggressive mortgage I could afford - only 15 year amortization, and lived in it until last year. I traded up to a bungalow and have zero mortgage today - I own it free and clear. I am by no measure rich, but I am living in a home which costs me very little - taxes, utilities, and maintenance - a fraction of what I'd have to pay in rent for similar accommodation, and if/when I sell, it will be worth more than I paid for it, and several times what I originally paid for the townhouse.

Answer 4

Kiyosaki is changing the meaning of the term "asset".

For regular folks, "asset" is an emotional word, which means "thing of value". Liability means an undesired thing.

For cost accountants, "asset" is a term of art: it's insider jargon for use within that industry. It has a Very Specific Meaning defined by a web of laws and rules. Whatever, you don't need to care unless you sit on a Board. Which I do.

Trouble is, Kiyosaki is talking about consumer finance, which "kisses" the accounting field just enough to make accountants say "HEY!" And that's what has people upset about his re-definition.

Just know that he changed it, and let him have his definition inside his book.

Really, he's talking about the emotional sense of the term, and he is trying to break you out of the idea that if a house is an asset, a bigger house is a bigger asset. By removing the "Asset" label from the house, he also puts it "on a level playing field" with definite non-assets like rentals, live-aboard boat, large RV, whatever, anything. Home equity isn't nothing; he's just saying it isn't everything and a home is still a money pit.

Having seen nice full-service retirement condos, I really feel sorry for active seniors who are still clinging to that empty nest because of the warm fuzzy feeling of "equity".

Some counterpoint views

I for one think Kiyosaki is a bit much to take if that's the only voice you're hearing. As such, I'd like to recommend a few more balancing views.

• Robert Allen has written a lot about real estate, particularly the idea of developing a portfolio of houses to develop passive rental income. His ideas are reasonably compatible with Kiyosaki's, but I particularly like one of his notions: "Never sell". He will never pay taxes; his estate will.
• Robert Irwin has good, well-balanced real estate wisdom. He's not flashy, heck he doesn't even show up in Google - he's buried under some kid who was on Fallon.
• Depending on your politics, Dave Ramsey or Suze Orman - both more-or-less equally good general financial advice. However you must take with a grain of salt their paranoia about Debt, especially Dave. By and large they are speaking to a demographic that are simple consumers, not businesspeople, and have not handled credit in a professional way. (heh, found a way to say it inside our "Be Nice" policy!) As your financial skills and habits improve, hopefully that won't be your problem.

Answer 5

In general terms an asset is something that helps you “my neighbors were a huge asset when I moved in, introducing me to the neighborhood watch and telling me about the deli that is open all night”. In financial terms, the meaning is similar, it is something you have that has value. It can be a tangible or intangible thing (real property or reputation for example).

He is using the term in the general sense — owning a house does not always help you. Simple example is the recent housing crisis where many people had the value of their property drop below the amount they borrowed to purchase the house. Almost all of those people would have been better off renting a house instead. Buying the house wasn’t helpful.

But in financial terms the house was ALWAYS an asset, it was something they had which had a value. The fact that the value was less than the liability associated with the house is irrelevant: it has value, it is theirs, it is an asset. The lien against the house was a liability, and the liability was greater than the value, but that doesn’t magically change the house into a liability any more than the reverse would change the loan into an asset.

I haven’t read the book, but I would be leary of any advice it contained if the two meanings were used interchangeably.

Answer 6

He was trying to say "does a house behave more like and asset or a liability" on your balance sheet. If the net result of your house is cash flowing out of your accounts into someone else's then Robert wants to say its behaving more like a liability than an asset.

This is all supposed to be in the context of his strategy for gaining wealth which is to have a balance sheet full of cashflow positive "assets". He is not using the typical definition because he says that an asset is anything that puts money INTO your account; and a liability is anything that takes money OUT of your account. He is making it into a simple binary choice for easier decision making on the path to acquiring more wealth. You have to know if you are acquiring things that are draining you financially or growing your wealth.

In some cases, a person's home can be the biggest liability they have, which for others it might be their greatest asset. Its supposed to show you how to look at your own relationship with your home and to be able know how to move forward with his strategy.

Answer 7

This has been covered in several answers already posted, but I thought it worthwhile to restate to, I believe, more directly hit the point and zero in on the valuable part of the perspective Kiyosaki is giving in the book.

Kiyosaki's goal here is not to teach you about "assets" vs "liabilities". A house is an asset, a mortgage is a liability. It's to teach you about "opportunities" and "opportunity costs". The house you live in is not an opportunity - or, rather, I've heard of people who actually make an opportunity out of their house, but the vast majority of people do not. A house is an opportunity cost - the money you spend on the house you live in is money you no longer have available to invest into new opportunities.

It's important to realize, at the same time, investing your money into anything, whether it's an opportunity or not, creates an opportunity cost - that money can't be used for some other opportunity until you get it back.

2 things are important at this juncture - your house is likely to be your single largest expenditure until your assets grow considerably larger than the average citizen, and it's probably also the least liquid thing you'll ever own. The cost, and the opportunity cost, is pretty much guaranteed to be the largest of anything you ever pay for.

The point is that if you want to maximize your financial potential, you need to allocate as much of your money as possible to opportunities, and you must understand that spending more on your house does not meet that goal.

That Kiyosaki uses the word "asset" to make this point is more of a colloquial use of the word, but it's unfortunate that he uses it in a context that can confused for a more technically financial sense.

Answer 8

TL;DR:

A house is an asset if its value outweighs its liability.

---

Their claims are a bit succinct, simplified, and leave a lot to the imagination but here is a basic breakdown:

If my wife and I were to buy a bigger, more flashy house we realize it would not be an asset, it would be a liability, since it would take money out of our pocket.

can be translated into:

We currently own a house which we can adequately handle and live our lives. We can "afford" a bigger and flashier house through the power of mortgage but then the mortgage payment would be higher, the taxes would probably cost more, homeowner's insurance would be higher, the upkeep cost would be higher for basic maintenance and renovations, utilities such as heating and cooling would cost more, etc... so all of these expenses increase the likelihood that we will be unable to keep up with its cost whether it be through job loss, sickness, major disaster, etc... so even though you get to live in a shiny big house, it will sink you financially at the first chance it gets.

Answer 9

Setting this book and its author aside, the thing you should know is that committing too much of your discretionary income (making it non-discretionary) to a home is a major (and common) financial mistake. First of all, home ownership means you are responsible for repairs and maintenance. If you can't afford to maintain a home, the value will diminish. You are also likely going to want to furnish it.

Secondly, the home you live in typically doesn't generate income unless you rent part of it (e.g. owning a duplex and renting one unit) while property taxes will limit any growth in value, which isn't guaranteed. If you purchase a home in a good location, you will likely have value in it if you have lived there for 2 or 3 decades but you could end up with less than you put into it.

The upshot: you don't want all your eggs in one basket. Make sure you have additional income for investments and living your life (e.g. going on a reasonable vacation every so often.) You don't want to be a slave to your home. A home is a lifestyle choice more than it is an investment. Be cautious about how you put money into it and don't over-extend yourself.

Answer 10

"do you consider a house to be asset?"

Yes, but not one that is always easily realisable because you need somewhere to live and if you're paying a loan then it's an asset that you only own a fraction of.

However, there are ways to utilise this asset. You could rent a room and earn some income. You could rent the entire home, rent something smaller and cheaper, and live on the difference as I am doing. Pay off any loans, downsize, and spend the difference.

Answer 11

Short version, a house is an asset. But an asset is not necessarily an investment, or a wise investment.

Assets and liabilities

If your interest is focused on labels and classifications then anything one can utilise (benefit from) due to owning it, is an asset. My shoes, my computer, my house, any rights I may have under a contract or lease, any rights that come with my property, any money someone currently owes me and will have to repay (but not future interest on the loans) - these are all assets. I own them, and can benefit from them.

Similarly, the loan I take to buy a car, or a computer, or my house - these are all liabilities. They are the assets of whoever owns the debt (the lender or finance company I borrowed from).

Assets bought with loan/finance

Sometimes the two work as a package. I might buy a car or a property using finance from a company (hire purchase of a car, mortgage on a house). In that case you can look at the two parts separately or as one package - both are valid views depending what you are doing. So you have an asset (you own the car or house) and also a liability (you owe someone else for the unpaid loan/finance you borrowed to buy them).

Typically the loan/finance is secured - if you don't keep up payments they can take the asset to pay your loan. But unless that happens, even though you have repayments to make, the car or house is yours and you have full ownership rights.

You can see the importance of this, by imagining you buy some asset with finance, and the asset changes value a lot. Say you buy a house (or car, or painting, or stocks/shares), and the value doubles in a few years, all that extra value is usually yours, because you own the asset, even though you have finance on in. Equally suppose the value halves after some years, all that loss is yours as well, because you still owe the original finance repayments.

This shows how the asset and liability are actually still two separate things.

Assets and investments

An investment is usually an asset you bought, specifically believing it will gain value or generate money for you over time. You might also use your house or enjoy a painting in the meantime, but it is considered an investment as well, if you expect it to generate money (wealth) for you over time, just because you own it. That's a very rough definition - more technical definitions do exist, but you get the idea.

When you buy something expensive, you usually consider questions like risk (what are the odds of gaining and losing money on it, and the best/worst outcomes), return (what will you get from owning it), affordability (do you expect to be able to maintain repayments on any finance/can you afford to sacrifice existing money to buy it or make a down payment), and time scale (how long a period of time will you probably want to hold it for, and what is likely to happen in that time). These questions become much more important when you are buying something as an investment.

Emotional security/value of property

Houses mean more than just money to most people. No discussion would be complete without recognising that fact.

For example, it may feel more secure emotionally, to buy a house and know that if repayments are kept up, you don't have to move in future. Within broad limits you can live in it as you wish, decorate and furnish it how you like, give it to your children to enjoy after you, and nobody can say otherwise or take it away from you. It is yours. That emotional security could be a benefit itself.

Property as an asset and investment

So you can see that a house you own can be viewed in several ways.

As an owned item, it is an asset, possibly bought with a loan (which is a liability). You own it, can use it, and any gain or loss in its value is your gain or your loss.

The liability is separate. If you keep up repayments then eventually your liability vanishes (the loan is paid off), and only the asset is left. If you don't keep up repayments, the lender usually has a right which you agreed to, to take the asset and use it to repay the liability. If there is money left over, it's yours, if there isn't enough money you will still owe them the balance you haven't repaid.

As an investment, you house and its finance (if any) work as a package. You might consider how risky it is (risk of house prices rising and falling), money saved (rent), risk of extra money needing to be spent (if there is a problem you have to fix it, not some landlord), affordability (you can't so easily sell a house as change where you rent, if you need a lot of money suddenly), time scale (you might figure 30 years ahead the house will be worth much more than it is now. But it might not, or you might lose your income and be unable to pay the loan).

So as an investment, the house can be a good or a bad idea, depending on your personal situation and your "take" on the future.

So when you think about buying a house (or indeed any significant asset), you are balancing all these - the benefits and risks of ownership, the possible requirement to get a loan/finance (credit record, present+future ability to repay, willingness to commit to repayments), risk of future unexpected expenses etc, and the risks/rewards of it as an investment, and the possible emotional value which it may or may not have.

Answer 12

Depends. Do you have a loan on it? If so, it is an asset for the note holder. Do you rent it out and it makes money? If so, then it is an asset for you. Do you just live in it and have to pay money every month to keep it? Then it is a liability for you.

Answer 13

A house is an asset, but it's similar to nearly every other asset like a car: it depreciates, and if you don't put any money into it, it depreciates faster.

Sometimes, people claim houses appreciate. This is based on three misconceptions:

1. The house price index appreciates according to inflation in the long run. (If someone claims that it would appreciate faster than inflation, beware! Don't follow any advice from people claiming that.)

2. Most homeowners maintain a house in good condition. This means that they put lots of money into it. But it wouldn't then appreciate naturally but via putting money into it.

3. Houses have a lifetime far longer than cars, so the lifetime is so long that in such a long run, inflation really matters. But inflation isn't real appreciation.

Now, consume a hypothetical house that's today 10 years old. Fairly new, therefore. In 50 years the house will be 60 years old. Would you pay as much for a 60 year old house than you would pay for a 10 year old house? Probably not, although if the 60 year old house was built very durably, has been maintained well, and is in an area where houses have high value, maybe you could pay top dollar for it. But that would mean the 60-year old house maintaining value would only be due to the massive amounts of money put into it during its lifetime. If a 10-year old house becomes a 60-year old house and during those 50 years no money has been put into the house, it is probably about worthless.

In the house price index, the average house is maybe 40 years old. In 50 years, it still will be maybe 40 years old. Some new houses have been built and some old houses have been demolished so the average house is still as old as it used to be, even though 50 years have passed.

So, believing that your house appreciates according to the house price index is foolish. The house price index reflects prices of houses of constant age. Your house will become older as it ages.

Living in a house you own isn't investing. It's consumption. It's an expense, there's an opportunity cost. If you sold that house, invested half your money into stocks and moved to a house half the size, costing half the amount of money, you would be better off. Thus, a big house isn't an investment. It's consumption.

Also, even if you buy a minimally sized house so that you could think it as "investing" rather than consumption, beware of several bad features of houses:

1. Houses have about as high risk as stocks. Yes, that's true even though most people don't realize it. In the history of stock market indices, we have had 80% reduction in value (Great Depression). In the history of houses, data is more scarce but at least there's Herengrach index which reduced from 317.86 real value (1778-9) to 68.06 real value (1814-5). That's about 80% drop in value.

2. Houses have extraordinarily poor diversification. If you invest into stocks, you probably diversify well. But if you "invest" into houses, you probably buy just one house. That's far more massive risk than buying the entire house market index. Therefore, if the Herengracht index can reduce 80% in value, your "investment" into just one house can probably easily reduce 90% in value.

My opinion, therefore, is that if you can expect 8% nominal yield from stocks, you should demand 12% nominal yield from a single house (due to the greater risk which should imply greater returns). With houses where you live, the yield is caused by not paying rent. If that yield isn't 12% or more, your house "investment" isn't probably justified.

However, to the original question: is house an asset? According to accounting, it is, if it has value. Most houses have value. Similarly, most cars have value, even very expensive sports cars. However, you could end in a hypothetical situation where you own a too big house in an area where nobody wants it, you have to pay regular expenses and property taxes caused by that house, you can't demolish it due to some law, so yes, in that case, a house can actually be a liability. The only legal way of getting rid of that house might be to sell it, at a negative price! (So you may need to pay someone to accept to own that house.)

But apart of that case of negatively priced house, if a house has positive value, it's an asset not a liability, at least according to accounting. But not every asset is wise to purchase. If you are a computer programmer and buy a hammer, you probably won't gain anything out of it. If you are a carpenter and buy a GPU number crunching server, you probably won't gain anything out of it.