Rich Dad says a home is a liability………

Arn Cenedella · 2023-08-13T06:03:50-07:00

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.

Dan H.Pro Member

Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes

3y

Quote from @Brian M. Adams:

Quote from @Dan H.:

Quote from @Brian M. Adams:

Quote from @Dan H.:

Quote from @Brian M. Adams:

@Dan H.

I suppose it depends on whose definition of asset you use.

From Investopedia:

"An asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit.

Assets are reported on a company's balance sheet. They're classified as current, fixed, financial, and intangible. They are bought or created to increase a firm's value or benefit the firm's operations.

An asset can be thought of as something that, in the future, can generate cash flow, reduce expenses, or improve sales, regardless of whether it's manufacturing equipment or a patent."

Looking at that definition, it isn't far from what RK uses, since your primary home isn't typically going to "...generate cash flow, reduce expenses, or improve sales,..." unless you are house hacking.

Except RK states your home is not an asset. It usually is an asset (has value).

He does similar with trying to equate investing with cash flow. Investing does not ever need to achieve return. If it is expected to achieve return, it is an investment. In my market homes have outperformed inflation for every 10 year interval going back over 60 years. I think it reasonable that you buy a house and expect to own it 10 years that you expect return and have made an investment that also happens to provide housing (not to imply it is investment first, but to imply it can be, and in my market usually is, both).

Words have meaning and to define them differently to create controversy helps sell books. If RK only stated the obvious, he would sell a lot less books, have less media appearances, have less paid speaking opportunities, and would not be able to sell his real estate courses (I believe he sold off that part of his business). This is where RK has made his money. Sure he made money with Velcro wallets, but it crashed and he lost most of that money. He made and lost money in RE. But his books and opportunities derived from the books have been his primary source of wealth.

Let me ask you this. In that same 10 year span, would you have gained or lost if you sold the property? You would have lost, no matter how you look at it. Let's assume a $200k mortgage at 6% for 30 years. In that 10 years, you would have paid over $111K in interest alone while only paying $32,628.55 down on the principle. Even if you sell it for $300K, you would still be upside down by over $10K.

Yes, if you were to create a personal balance sheet, the value of the property would go in the asset list, but all of the costs associated with it, such as mortgage, taxes, repairs, etc., would also go in the liabilities. Unless those costs are less than the value of the property, it should absolutely be considered a liability. The same applies to a car, boat, or anything else.

>the value of the property would go in the asset list, but all of the costs associated with it, such as mortgage, taxes, repairs, etc., would also go in the liabilities.

that is exactly my point. RK use has asset and liability being mutually exclusive because he uses RK definitions and not the common definition. As you point out, something can be both.

>In that 10 years, you would have paid over $111K in interest alone while only paying $32,628.55 down on the principle. Even if you sell it for $300K, you would still be upside down by over $10K

Every one of my properties in my market appreciated more than $100k over 10 years. I have properties that have a value that has increased over $8k/month for the hold. Granted I never purchased in 2006 to sell in 2016, but I have purchased many properties in my market and my worse has gained more than your example and my best is on pace to gain ~1m in 10 years and I have another that has gained just over $2m in 22 years

Even if I used your numbers, I suspect few would not realize the value of staying in a property that varied in value from $200k to $300k for 10 years for a cost of only $10k (or an average of $1k cost per year).

So you're telling us that properties where you are have all grown by over $600k over the past 60 years? Not sure where your market is (I suspect somewhere very high end with a high cost of living since you are in CA), but that is not the norm in most places. Here in VA the median home value for owner occupied properties is less than $300k.

I question your calculation method as 60 years ago there was no $200k non-commercial properties in my market. A property purchased 60 years ago would have had a total cost over the mortgage period of a fraction of $600k (30 year mortgage paid off 30 years ago).

However, the average property in my market has appreciated far over $600k over the last 60 years. This would be many times the total mortgage payments of a home purchased 60 years ago.

You keep making my point for me. My point is not that every market should the OO Home be considered an investment (an investment is an item that you expect to produce returns), but in some markets it is very reasonable that your OO home will produce return. In my market it would be very likely that your OO home will produce return (it has for over 60 years) and that buying an OO home is an investment.

I would also make the case that even in some markets that have not had the appreciation of my market, if an OO home is costing less than renting then in some way it is producing return but this is less clear with regard to the definition of return (I claim reduced living expenses is a form of return).

Have a good day

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Brian M. AdamsPro Member

Member since 2018 · 20 posts · 6 votes