Assets and Liabilites

7 Replies

I just finished reading Rich Dad Poor Dad and I loved every bit of it.  I don't necessarily agree with every point he makes, but it's been an eye opening book and has made opened me up to many more schools of thought!  I loved what I learned from the book, but I wanna hear from members new and old on what their take is.  

First, what do you think about Robert's stance on Assets and Liabilities?  When I first bought my house, I thought I was investing in an asset.  I thought it was a smart investment in a nice neighborhood in a nice town.  I was able to buy the house at a price that I was comfortable with, with the intention of doing a live in flip and renting out the house when I move.  While I still feel like I did the right thing and that I'm following the right steps to where I eventually want to get to, I think Robert's statement about my house not being an asset is really interesting.  I understand where he is coming from, with the simple definition that a liability is anything that makes cash flow out of my pocket, then my house is definitely a liability.  But I still see my house as an asset seed, it's an investment that isn't cash flowing for me right now, but I've planted the seed and I'm going to keep watering it until it finally grows into a cash flowing investment.  What are your thoughts on whether a house (not a rental) is an asset or a liability?

After reading Rich Dad Poor Dad, and playing cash flow a few times, I've been wondering what other people are investing in?  What are you adding to your asset column, and what are you staying away from?  I know for me, I want to add single family homes and plexes to my portfolio and to build my base.  I like doing projects around the house, and I know my wife loves making houses cute and she has great interior design tastes.  What are your investment plans and strategies?

@Maxwell Emerson Great morning,

Your house is not an asset now because of the simple definition that you mentioned. I would not call it an asset until you can flip it around and make some positive cash flow.

I'm avoiding debt at all cost right now. Im in extreme debt paydown mode for at least the next two years. Why? I tried to BRRRR a property only to be unable to do the refinance because my DTI was screwed. I was able to sell the property so it was essentially a flip. I'm increasing my income by acquiring as many associated licenses that go with my profession to increase my marketability and continuing to master my craft. Within the next two years, I will increase my income 25-50k/year.

When I jump back in to purchase more properties I will be in a better cash position and a better credit position. I invest in SFH but I'm interested in multi-units as well. Also in my portfolio will be low cost index funds. For more on that subject I highly recommend Simple Path to Wealth by JL Collins. Another great book is Scott Trench's Set for Life.

I wish you the best!!

I've just finished the audio version of the book and ever since I have been walking around with a slight smug feeling I know more than the average Joe. It's totally true (in my opinion) in his teachings, which they are. My father was a successful accountant but taught me nothing really about money other than don't spend more than you can afford, get a good education, get a good job and then buy a house, car and then work till your 65.... 

Rich Dad is totally worth the read just to open your mind to the possibilities! My wife and I are now on our investing road and working hard to buy assets, our house is not one of them. We own it in full, but this is still a liability. Watching my friends and my sister increase their mortgage to make an extension or buy a new kitchen, so the house is worth more hurts me to see! If only they knew! 

We are purchasing low end small houses for rent, because the apartment market vs return is not worth investing in this area now. 

Just working on the financials for my FIRE number, looks high but you need big goals :-) 

@Eric H.

So what exactly happened with your BRRR that made it not work out? Your DTI was too high, but how did you finance the property on the initial purchase and what held you back from getting the refinance and hold on to the property? What would you do differently with the deal to work better for you on your end?

Just because your house is a liability (not an asset) doesn't mean it isn't very useful or necessary.  No doubt, you need a place to live.  You also need food, water, electricty, etc.  but you likely don't consider them assets right?  

I suspect folks get confused because the home builders, realtors, and mortgage vendors have done a good job of convincing us that our houses are an asset/investment over the years.  But this is more advertising than reality.

I also think people get confused because owning a home dramatically reduces the amount that you end up spending on the place that you live.  (Especially once the mortgage is paid off!)  A penny saved is a penny earned after all, so this makes home ownership look suspiciously like an income increase.

You mentioned turning your home into a cash-flowing asset.  I'm not 100% sure how you do this.  I'm guessing you move out and rent the home out to someone else?  In that case, you still have to have (and pay for) a place to live.  All you've done is move the expense entry for that place to live to another address.

Over the long term, house prices tend to follow inflation.  So we can imagine buying a home for $300k in our 20's, living until we're 80, and having our heirs inherit and sell the home for $600k.  Viola we have a $300k gain on our "investment" right?  Not really, our heirs will discover that $600k buys them a home comparable to the one they are selling.  The same inflation that increased the value of our home, also decreased the buying power of the dollars our heirs get when we sell the home.  So, not an investment right?  (Or at least a pretty crummy one.)

@George Pauley

I agree that buying a house is smarter than renting, but I still don't believe that the property I live in is an asset unless it's also cash flowing, such as a duplex. An asset is only something that makes passive income, and that's why a SFH isn't an asset, at least according to Rich Dad Poor Dad. I still think my house is an investment, and something of value that can be passed along to my kids and family on the future. And I agree with your point that I'll always need a place to live, but I don't think that a necessity doesn't makes it an asset.

Originally posted by @Maxwell Emerson :

@Eric H.

So what exactly happened with your BRRR that made it not work out? Your DTI was too high, but how did you finance the property on the initial purchase and what held you back from getting the refinance and hold on to the property?

I purchased the property using hard money. The HML also used another property I own free and clear as collateral. Essentially I had no money in the deal upon closing. After the rehab and getting a tenant in place I tried to refi but was denied because of my DTI. DTI requirements will vary by lender and product but I think my lender was looking for something lower than 40%.

What would you do differently with the deal to work better for you on your end?

I'm increasing my income and paying off my debts so my DTI will be better.