Rich Dad Poor Dad - Do you rent or own your primary residence?

22 Replies

For those of you who've read Rich Dad Poor Dad, I have a question. Author Robert Kiyosaki advises to own assets, not liabilities. He says that buying your own house is a liability, since cash leaves your pocket each month for the mortgage. Further, you're locking up your capital (down payment) which you could've invested used to buy an asset. His advice is that you should first acquire all the assets possible, and then when ready, you can buy your first primary residence house, using the money that came from your assets.

I fully agree with him on this, except I'm wondering if this applies to expensive/high-appreciating markets, such as LA or SF. 

Let me explain. 5 years ago, you could've bought a house somewhere in the midwest for let's say 100k. If you instead spent those 5 years acquiring investments, and bought that house today, it would cost you 125k. While 25k seems like a lot, if you buy and hold the house for 15 years, it's really not all all that much in the long-term.

However, using the same scenario in the LA or SF market, could mean a HUGE opportunity lost to buy your house as prices are growing so fast. 5 years ago, a house that cost 380k today costs 500k. 


1. Do you think the advice given in Rich Dad Poor Dad mentioned above applies to high-appreciating markets? 

2. Would you avoid buying a house (liability) and instead invest into assets if you live in LA or SF?

I would say it's even more of a liability to buy your own personal home in a HCOL area. With massive appreciation comes massive falls when the market corrects. If you have the cash to invest a full 20% down on a primary residence AND it won't hinder your ability to buy additional rental properties AND you are okay living there through a market cycle then I would say go for it. BUT if you park your money in a primary residence and it keeps you from being able to invest, then I would say it's not worth taking the risk on appreciation.

I don't personally own my own home. I have several rental properties and will continue to buy them, but for the time being I will continue to rent. I would rather put 20% down on a rental property than 20% down on a primary residence. It costs us about $300/month more to rent the house we live in rather than owning one in the same neighborhood. But if we purchased a similar home we would have to bring $40k to the table to avoid PMI. So with no repairs factored in, it would be be 10+ years before we would get any monetary value from owning vs renting.

In your example you forget that the person who rented instead of buying that $100k house paid $100k in rent during those 5 years. So the renter doesn’t have the $100k to buy the house 5 years later, much less the $125k. 

How many non-rental homes do you think kiyosaki owns? Without looking I’m willing to be the number is higher than zero. 

Could you extend the same thinking to cars? Always lease? Furniture? Appliances?

My life is busy enough without getting a 60 day notice to vacate from my landlord while I'm trying to celebrate Christmas or on vacation.

Ps. My almost exactly 5 year example in Vegas ended August 1st. $50k down made my primary a few hundred per month less than rent. I lived there 5 years 6 months and netted $165k more than I paid. Buy a good deal. 

Pps. I moved in to one of my rentals so I can sell after 2 years with a reduced tax bill. 

@Bill Brandt thank you for your insight.

For me, 5 years ago, I bought a 2bd condo for 380k with about 40k down. So my loan was 340k. Today, 5 years later, it's about 315k remaining. So while I could've spent about 150k paying rent, instead I paid 150k in total PITI over the past 5 years. But only about 25k was truly saved as it went to pay down my loan.

In summary:

5 yr rental expense: 150k

5 yr mortgage expense: 125k

However, thanks to high appreciation, if I sold today, it's valued at about 500k, so if I sold, I would get abut 175k before closing costs and selling fees. 175k that I would not otherwise have.

I would conclude that in high appreciation markets, in the long term, it would make sense to buy a house (liability), even though you are locking up capital you could've invested in an asset. But only because in the long term you are making good ROI. My ROI seems to be:

175 (total equity) - 40 (8% selling costs of 500k) = 135.
135/40 (initial investment down payment) = 337%

@Paul Wolfson I own my home because I have a wife and kids and want to live where I live until I don’t anymore. I bought in the best school district in the state, so it is an investment in my children’s education and overall well-being, not just money in my pocket

@Paul Wolfson I could have, but what happens when my LL decides to terminate my lease and I have to tell my 5 yr old son that we have to leave the home that he was born and raised in? No amount of money is worth that, IMO.

Additionally, the area that i live in has consistently had 15-20% appreciation in home values, and will always be a desirable place to live regardless of the economy (many of the residents aren’t effected by the economy)

A primary home can either be both an investment or liability, like any other investment...and depending mostly on how you approach it. 

What other investment is 1) massively tax advantaged on both holding and exiting--you will never find a tax break on your rentals like the capital gain exclusion on your primary home 

2) offers leverage to people at an income level where its hard to otherwise access its power

3) offers flexibility within the holding period--you can rent out a floor or a room in a pinch even if you stay there 

4) ability to borrow against (perceived) equity which can be used for other investments. Risks to that, sure, but try to do that with mutual funds....

5) offers the degree of consumer protection a home does and the shielding of assets from college costs, bankruptcy etc.

It can be a bad investment, of course, like anything else. But its silly not to acknowledge its potential power.

In a high appreciation market here, and primary home investments have opened the doors for everything else. We also usually rent out part(s) of ours. Of course, it has been a good decade since 08.....

For me personally, I was renting in Kansas City in an economy apartment for about $615/month + utilities.  I purchased a 2 bed 1 bath home that had a mortgage of about $550 + utilities that I lived in.  In my case, I transferred my rent to having a mortgage with the benefit of a mortgage allowing me to slowly grow wealth.  When I purchased my house, I had a longer term plan to turn it in to a rental in a few years, which I did.  While I lived in it, I was able to invest my money to making upgrades to it so it would rent for a higher amount (new bathroom, kitchen, refinished wood floors, paint, etc.).  In December of 2018, my first tenant moved in after living in the house from 2016 - spring of 2018.

So to summarize, I transferred something that was 100% liability, in to a mortgage that would be 80% liability (interest) 20% wealth generation (principal) - liability but a little better, in to something that is now in the asset column.

Now because I had the house for about three years, I have built up equity through principal payments in addition to appreciation, I am looking to expand my asset column by using a HELOC to purchase a second investment property. Assuming the appraisal comes in high enough. I think having a plan and a balanced approach is a good way to apply Rich Dads Poor Dads message.

Don't forget, if you live in it for a year first and then make it a rental you'll get 29 years at a reduced interest rate. If you're truly only renting where you live to maximize every last dollar you would certainly do that. It would also allow you to put down 1/5th as much of your own money if you aren't cash rich.

I purchased a townhome in LA six years ago for $405,000. After four years of owning it I sold it for $535,000. So in those four years I got back the downpayment I originally put into it, the principal that I had paid down, and the appreciation. I took that $235,000 that I netted from that property and purchased a larger home that I now rent out to film studios and will also be pulling a HELOC out to purchase my rental properties.

Without purchasing that first starter home I wouldn't have been able to do any of this.  My parents own a ranch, vacation home, a hotel, a bar, and a few other investment properties and they really pushed me to purchased my first home to learn about home ownership and build equity.

I agree with @Cassi Justiz that I think it can be more dangerous in the HCOL areas. She mentions it because of the degree of the market corrections, but I look at it from the holding costs. Sure, you get a lot more in appreciation, but all the while you have a ton more in costs. So you have to weigh that out.

In general, I also rent where I live (I'm in LA, so stupidly HCOL) and just buy investment properties. I'm 100% on the Rich Dad bandwagon about this. I wrote this a while ago, if it helps, but it speaks more just to whether to buy your own home or buy investment properties in general, whereas you're specifically asking about HCOL areas, but in case it helps-

I love the Rich Dad series, but I STRONGLY disagree with the statement that a primary home is a liability.  You ultimately have two choices.

1. Rent your home, buy an rental investment

2. Buy a home, don't have enough money to buy a rental

In either scenario you own a singular property, it just depends if you choose to live in it or not.  A market correction will effect your singular property the exact same regardless if it is a rental or not, and regardless if it is a high cost of living area or not.  It's value will rise or fall, and likewise the amount of rent you can charge will rise and fall, just like your rent that you would owe your landlord should you decide to rent your primary residence.  In good economic times the rent that you can charge on a rental will go up, but likewise you will now also owe more rent to YOUR landlord, so it's a wash either way. 

However, if you rent your home you are at the mercy of your landlord.  In most areas your landlord can choose to not renew your lease at any time.  LL want you out?  -Guess it's time to pack up and move and hope that you can stay in the same school district for your kids sake.  You also have to ask permission to do absolutely anything.  Feel like painting the nursery?  -Ask the landlord first.  You are subject to annual rent price increases.  

In addition to the frustrations of renting from a LL, you also have the frustrations of owning a rental property.  Tenants late on the rent?  Destroying the place?  There are simply more things that can go wrong, from both sides of the fence.  

However if you simply buy your own home, you don't have to worry about many of the costs associated with owning rentals such as property management, vacancies, or the majority of repairs. Since you will be occupying the property yourself, you know that you will take good care of it, much better care than a random tenant ever would which will drastically reduce your capex and repairs costs. And to top it off, you get much more favorable loan terms on owner occupied loans than for rentals. If you buy a home and live in it for a year prior to turning it into a rental you can often save tens of thousands of dollars in interest over the lifetime of the loan.

I own my home. We built is 5 years ago. I believe a home can be an asset. My housing costs are locked in at a low rate and not increasing with inflation. I build equity each month. I use my equity to purchase and fix up other real estate. I have cash flow from these properties. I use this cash flow to pay down my mortgage even more creating more wealth and giving me more equity to buy more properties. Plus my house is nice and my wife is happy. I have an office where I can conduct my side business at home generating even more cash flow, my kids live in a nice area. I have a three car garage where I can store my cars and boat which helps maintain them longer so I don't spend money as frequently on vehicles. And my monthly PMT is not much more than what a much smaller rental would be.

The easiest home to buy is the one you will live in.  There are massive tax advantages when you sale, why pay rent when you can buy?  I have always tried to buy my own home, then rentals, and would do so again.  It can vary from person to person though.  If you can buy and rent a home and make money, then why not pay rent to yourself>  Who would be a better tenant?  I get not buying a $200K house that would only rent for $1K, but be smart when you buy.  If you want to move then, rent it and move and buy another.  Sure you have maintenance costs and taxes when you own, you have that with rentals too.  The only thing you don't get is depreciation, but you do get the homestead exemption on profits.  If you want wealth for freedom, your first freedom is being able to do what you want under the roof you live in.  You can choose what paint color, what to improve, what to change, etc.

@Jerry W. the dilemma here is not whether it’s better to pay rent to yourself versus paying someone else’s mortgage. The dilemma is about the missed opportunities. You could’ve used the down payment you put on your house to instead invest in assets. 

@Paul Wolfson , normally the down payment required to buy a residence you live in is much lower than for a rental. You also normally get a lower interest rate and longer amortization for a rental you live in as compared to a commercial rental property loan. It is like a supercharger on your cash on cash metric.

To you original question, yes it could be considered a liability but one that appreciates over time vs other liabilities that depreciate.  If you had invested in the bay area even 5 years ago in some areas, you would have made a lot of money still and not missed out on the appreciation.  I've seen rents go up significantly recently in the bay area so in some cases it would have been better to buy vs having to had increasing rents.  With new laws for renters, maybe that'll be different.

Rents have gone up but i've had friends who's landlords have been nice and not increased their rents much because they are good tenants (maybe difficult to find and landlord like that).  We have been pretty good with one of our tenants not increasing their rent much over the past 7 years since they always pay rent on time and never have issues.  If you have this situation, then I would say invest in more assets. 

My neighbor bought their house and rented it out right away which actually covered PITI completely. They didn't move in until a couple years because it was just 2 of them and they didn't need a 5 bedroom house until they would have a family so they lived in a small condo. Later when they moved in they still rented out the in law suite for $1500 a month which covered a big chunk of the mortgage. So they had a lower price point, lower mortgage/property tax and all that before moving in 2 years later when it had appreciated 30%. They did well to buy their future property as a rental.

I think everyone is different in terms of wanting to own their home or rent and invest.  It could go well either way and their are successful people here that have bought their own homes before renting out and others who have rented and invested wisely.  I've seen plenty of people rent and buy fancy cars and DJing equipment so it really comes down to mindset.