Rich Dad says a home is a liability………
Many investors quote Rich Dad to support their contention that a HOME is not an investment.
Often this is done as an argument to invest capital in their commerical real estate deal instead of buying a home. Let me also say, I love buying rental real estate. I own everything from single family real estate to 200 unit plus apartment complexes. I am PRO rental real estate ownership.
This argument is simplistic at best and in my opinion often false because it ignores the cost of shelter.
If one doesn’t own a home they have to pay rent somewhere else, right?
Before looking at numbers. let’s frame the question by posing the following two questions:
1. If paying a mortgage payment is a liability, then what’s paying a rent payment? An asset?
2. As an investor, we are told it’s a great thing to have our tenants pay the mortgage. I agree.
But if an investor doesn’t buy a house, he is a tenant and laying that investor’s mortgage down.
There’s a logical inconsistency here. If it is good for YOU to have a tenant pay down YOUR mortgage, why is it good for YOU to pay down someone else’s mortgage? That makes no sense, does it?
Let’s look at some numbers:
Let’s compare rent v ownership numbers.
First, let’s recognize paying $3,000 in ownership costs AFTER TAX is equivalent plus minus to $2,000 a month rent. Often the after tax cost of ownership is equivalent to rent. And if you get a 30 year fixed rate mortgage, it is almost certain the cost of rent will go up much faster than the cost of ownership.
What about the down payment required to buy a house?
Let’s assume 10% down - one can actually buy a residence for 3% down.
Let’s say one buys a $300,000 house with 10% down.
That’s $30,000 investment.
Let’s say value of house goes up 5% per year.
After 5 years, the $300,000 house will be worth $375,000.
Equity increases from $30K to $105K in 5 years.
That’s a 50% annual increase in value.
Is that not a good return?
Run the numbers anyway you want.
At 3% annual value increase, rate of return is 30% annual return.
Buy a house first, get great long term debt and then start building your rental empire.
Don’t believe every real estate mantra you here, they often are not correct.
