Is your home an asset?

I spend a LOT of time on this blog talking about your home, and rightly so; your home is often regarded as your single largest asset.

Or, is it?

TraineeInvestor reopens the debate with what I think is a really interesting – seemingly ‘throwaway’ – line in his comment to this post:

The overwhelming consensus of opinion on internet forums and blogs is that your home is not an investment. (There are even people who think it is a liability rather than an asset!!!).

The “overwhelming consesus” hasn’t made $7 million in 7 years, and probably never will 😛

But there is grounding to the home-not-an-asset way of thinking; for example, in this post I quoted Robert Kiyosaki who first told me that a home is NOT an asset [AJC: Unlike many others, I am not a Robert Kiyosaki detractor … Rich Dad Poor Dad was the first book that I ever read on personal finance and, at the time, it really opened my eyes to the value of financial education].

Here’s what RK said: 

  My Poor Dad Says   My Rich Dad Says
  “My house is an asset.”   “My house is a liability.”
  Rich dad says, “If you stop working today, an asset puts money in your pocket and a liability takes money from your pocket. Too often people call liabilities assets. It’s important to know the difference between the two.

Yet, paradoxically, TraineeInvestor also pointed to the exact opposite: study after study has shown that the wealthy own their own homes and the ‘poor’ do not!

So, what do I think?

Well – and, this may also SEEM paradoxical – I actually agree that a home is not  an asset in the sense that it doesn’t earn an income.

Of course, you could rent to yourself.

Tell me then, though, when do you – could you – ever realize the value in that ‘asset’?

Only if you sell (you never will); or, pass it on (it’s not an asset for YOU).

Yet, there is one way to realize at least part of the value of your asset (while you still need a place to live), and that is to release some equity by refinancing.

So, technically, I agree with the ‘non-asset’ thinking, which is why I ask you to at least minimize the equity in your own home to a mere (by Dave Ramsey standards) 20% or less of your current Net Worth (and, review annually).

I also advocate buying your first home – more for some ‘human nature’ reasons rather than strict financial reasons – but, nowhere in this blog have I ever said: “… then, upgrade it”! 😉

Why bother keeping up an esoteric “is your home an asset or a liability?” debate at all, when the only real question that you need ask yourself is:

Can I reach my Number if I buy my own home, then keep [insert ‘% of current home value’ of choice: 0%; 10%; 20%; 50%; 100%; other] tied up as home equity?

My standard advice is, YES … if:

a) I buy my first home (with whatever starting equity that my bank and I can agree on), then

b) [as soon as reasonably possible, start to] maintain no more than 20% of my net worth in that – or, any future – home as equity

c) and, reassess b) annually (against both my home’s and my own net worth’s current value)

Ultimately, the equity that you choose to keep in your home either helps you to reach your Number, or it doesn’t.

For most people, “reaching their Number” means amasssing ‘real’ assets in the range of millions of dollars. Logically, tying up valuable equity in something that can’t possible reach ‘millions of dollars’ in value is wrong, so why do it?

What does this all mean for you?

My ‘rules’ of home ownership are designed to give you the best chance to reach your Number by your Date.

Depending on how YOU choose to look at it, your home is either your single largest asset or single largest liability …

… the real point of this blog is to make sure that it doesn’t stay that way 🙂

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8 thoughts on “Is your home an asset?

  1. Adrian

    I have always been perplexed by the arguement that something which produces zero or negative cash flow is a liability. By that yardstick, a property development is a liability until it is sold or rented, a vacant rental property is a liability, an art or wine collection is a liability, a business start up is a liability, gold is a liabilty etc.

    For me the test of whether a house is an asset or a liability is whether it has value and whether that value has at least the potential to be realised. A house meets both of those criteria. (Whether it is a good investment or not is a completely different question.)

    Aonther question for those who think a house is a liability – if a house is to be considered a liability even after the implied rental factor is taken into consideration, surely it must follow that the same property is also a liability as a rental investment? There are only two material differences between the same house being owner occupied and being rented to someone else – tenant default risk and tax treatment.


  2. “a property development is a liability until it is sold or rented, a vacant rental property is a liability, an art or wine collection is a liability, a business start up is a liability, gold is a liabilty ”

    @ TraineeInvestor – Actually, I would agree that most (if not all) of the above ARE liabilities as they are speculations not investments … we are speculating that they will increase in value.

    A rental property (whether rented to yourself or somebody else) is not a liability IF it brings in positive cashflow (before or after tax benefits) … enough to pay its way compared to, say, CD’s or treasuries.

  3. A house is an asset. No discussion, no argument, it is by definition an asset.

    I always get annoyed when people misuse terms that have a specific meaning. Asset is an accounting term and it has a specific meaning. Let’s not confuse real financial and accounting terminology with Kiyosaki’s baby-talk babble (Sorry AJ, I know you like him, I still think he is a smooth talker with no content and mostly made-up stories – “I have a friend …”).

    You could say that owning a house is a cash-flow sink or a cash-flow source.
    But let’s not confuse the meaning of assets and liabilities, please – there are children listening, and they may get confused.

    I guess I woke up grumpy today.

  4. @ AJ: “Here, at 7million7years, we never let facts get in the way of a good story”

    I think you strike a nice balance, and I can’t tell the truth from the bull – good, sound stories. 🙂

    Kiyosaki on the other hand sets off my b.s. detector with nearly every utterance. Its like he is a bullshit artist who isn’t even trying hard to hide the bullshit. 🙂

    I guess its pretty much either you love or hate the guy. Quite clear where I fall…

  5. @ Jake – I hope that everything here rings true; I try and give all stories from personal experience. But, not everything happened for me in a nice, clean order: for example, I only found out about the 20% Rule a couple of years ago.

    I was lucky that I had been pretty much following it (but, that was probably simply because I had no extra cash to plonk into my house at the time), and then unlucky to have broken it recently and am now mentally suffering the consequences (now that I KNOW it’s wrong, I can no longer be blissfully unaware).

    I have no strong opinion on RK either way (I don’t know the guy): he has said that his ‘rich dad’ is actually a compilation of 4 people, and he has said that he wrote RDPD when he had a passive income of $100k (which puts his networth south of $2 mill. at the time).

    But, I do credit him – as the first or second personal finance book that I ever read (for better or worse) – with opening my eyes to the concept that there IS personal finance :))

    For that I thank him …. and, for your gutsy comments I thank you … we want MUCH more of that here (it’s how we all learn)!

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