I own my home outright...asset or liability?

Podcast Guest on Show #222

Tony Kim

Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes

8y

Originally posted by @Dennis M.:

@Kent McDaniel

Stop paying your taxes and you will find out real quick if it’s an asset or a liability

If it was a liability, you'd stop paying taxes on it and let the gov have it and not get anything in return and you'd be happy. Since it is an asset, we all pay our taxes when we can because we don't want to lose it.

3 Reply

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

8y

Originally posted by @Tony Kim:

Originally posted by @Dennis M.:

@Kent McDaniel

Stop paying your taxes and you will find out real quick if it’s an asset or a liability

If it was a liability, you'd stop paying taxes on it and let the gov have it and not get anything in return and you'd be happy. Since it is an asset, we all pay our taxes when we can because we don't want to lose it.

and for all those that buy low value and low end rentals in the mid west at tax sale that's exactly what they are buying someone's liability. and using their business acumen turning that into a performing asset...

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Podcast Guest on Show #222

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

8y

Originally posted by @Scott Smith:

Kent,

If we're talking about the home you own and live in, then your personal home is not a major liability based on the information you've shared. Definitely have insurance on that home for legal liability matters.

Your next question is a matter of perception. Most of us don't have personal homes that we profit from. But it IS putting money in your pocket, at least on your taxes. I assume you take a Homestead Exemption on your personal return. Also, you have a property that you own outright. That on its own is a huge asset and piece of security many aspire to. It could EVENTUALLY put money in your pocket through the magic of appreciation, as well. From where I'm standing, and with only your side of the story, it sounds like an asset to me.

As for your rentals, you want those to be secured. I'm an asset protection attorney. This is what I do all day--defend investment properties from lawsuits. But rarely would I ever suggest a home owner place their personal home in an LLC structure, because doing so would disqualify you from that homestead exemption.

can you elaborate on homestead exemption for liability this is not talked about in these states and if it is .. its usually a race to the recorders office.. and or for a small sum like 100k.. in Texas does it keep the entire equity protected... Me thinks for the homestead an irrevocable family trust would do the trick ??? Since your in asset protection business.. there is a lot of people on this site that think a simple one member LLC is asset protection … myself every time I have had a squabble the LLC is NO protection at least you still get named personally never have not been over the 3 decades I have been using them.. have not been in a ton of litigation but the hand ful that's what has happened.. usually real estate recession or partnership squabbles.. not GL type someone got killed on my property.. other than a few suicides but those we have no liability against. Would love your take on the LLC as asset protection.

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Eric Smith

Flipper/Rehabber · Dallas, TX · Member since 2018 · 13 posts · 4 votes

8y

Asset all day

Christopher Toth

Rental Property Investor · Denville, NJ · Member since 2017 · 107 posts · 54 votes

8y

@Jay Hinrichs I’d say, if it puts money in your pocket, it’s an asset. If it pulls money out of your pocket is a liability. Even a rental property that doesn’t cash flow I’d consider a liability, because it’s pulling money out of your pocket.

Rhonda Wilson

Rental Property Investor · Tacoma, WA · Member since 2018 · 113 posts · 149 votes

8y

In the language of Rich Dad Poor Dad, your home is a liability and it doesn't matter whether you have a mortgage or not. Just because it's a liability doesn't mean that you shouldn't own it!! One could sleep on Mom's or a friend's couch. Or, one could buy an old camper and live in that. Forgive me by going a bit extreme to make a point.

It's useful to think about what in our lives is an asset and making us money versus that which is not. It helps bring clarity to the financial decisions that we make. At some point, we have to decide on a balance between our devotion to increasing our income and net worth versus pleasure and comfort in our lives. I have a lot more house than I really need and also own a newer car when an older one would do.

The key is living below your means. That is the formula that creates the extra cash flow needed to build an asset base. If your house is paid off, I expect that you already know this and are living this way. Congratulations!

14 years ago we bought our first multi-family property. About the same time our best friends bought a vacation house in Bend. Is a vacation home not offered for rent an asset? Well, our multi-family provided us monthly income - small at first but it grew over time. Our friend's vacation home cost them in extra utilities, property tax, insurance and upkeep. If one home is an asset then two is double the asset. In fact, they are both liabilities.

Chris Martin

Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes

8y

I challenge anyone who says that a free-and-clear personal residence is a liability to say, truthfully, that on a PFS (Personal Financial Statement) that they would claim their F&C residence in the liability column when calculating their net worth.

I don't think so...

Balance sheet != Income Statement

4 Reply

Adam H.

Member since 2018 · 8 posts · 3 votes

8y

Your home is an asset. Like all assets, you may incur costs to secure it, so your tax and insurance payments are a liability. You may incur costs to operate it, so your utility payment is a liability. Calling an asset a liability is pretty silly just because you don't make money from it. You don't make a return on your asset, but you get option to live out of the rain and sun. And like all assets, you could put it in the liability column by renting it!

Bryan Clement

Rental Property Investor · Union, ME · Member since 2018 · 161 posts · 104 votes

8y

Two different mentalities. One is that if your house is debt free, it frees up your cash flow to invest in your new RE business. There is some validity to that. I am currently starting my own rehab business and I don't have a paid off house and it has been rough financially getting the money for my rehabs. My dad, on the other hand, has a HELOC on his house and has the lowest interest rate in the business (2.5%) and has no problem slapping down $160,000 on a flip. It just depends on your personal financial cash flow. He can afford it, I can't.

Chinmay J.

Investor · Northern, VA · Member since 2016 · 1k+ posts · 904 votes

8y

@Kent McDaniel - I haven't read other's responses, so while my response might sound similar, I reached the conclusions independently.

I have also read Robert Kiyosaki's book Rich Dad, Poor Dad. I mean who hasn't. If you call yourself a REI then that's a must read. However, I have come to my own conclusion, as we are *still* allowed to think freely in this country.

A home can be a huge liability, if its an irresponsible purchase. If someone making $100,000 a yr inherits a million dollar property, even if it were fully paid off, he won't be able to maintain it. The taxes, utilities, maintenance on the property will eat up most of his/ her earnings. What happened during the financial crisis was a terrible thing. People bought $600K-$700K properties when they couldn't afford half of it.

Now, a home can be a big asset (although may not be in strict Robert Kiyosaki's sense) if it is purchased responsibly, where the mortgage payments, taxes, maintenance is affordable. You have to live somewhere.. Unless living under the bridge is an option for you, your only real options are renting or buying. I never bought the theory that some subscribe to, that renting is better than buying.. You have have to be in a very, very special situation where renting would make sense. Most people don't fall in that situation.

Now, I would say that a fully paid home is even a bigger asset than home with mortgage on it. You can tap into the equity and buy/rehab properties.. Good luck.

Greg H.Pro Member

Moderator

Broker/Flipper · Austin, TX · Member since 2013 · 4k+ posts · 4k+ votes

8y

@Jay Hinrichs

Any judgements in Texas against your homestead are unenforceable except for the Big bad IRS of course. Of course other exempt property includes a couple of guns, horses, cattle , furniture and much more

Since we cannot garnish wages either, this makes collecting most judgments almost impossible unless they own more than one property

This was a big deal for developers in the last big crash in the 80s. They took what ever cash they were able to salvage and paid cash for a house

Link to: Rich Dad Scam #6: Your House is an Asset

Matt EklundPro Member

Rental Property Investor · Orange County, CA · Member since 2017 · 29 posts · 26 votes

8y

In the spirit of Rich Dad Poor Dad, look at it from an income/expense balance sheet prospective. Even if your home is paid off, you still have expenses in the way of taxes, insurance and maintenance. If you were to take out $300k out of your house and use it to put 20% down on 9 houses that cash flowed according to the BP calculators you could be making and additional $35-$50k per year (after Tax, insurance, mortgage and management but before maintenance and vacancy set asides). If you can take out $600k than you could put $300k toward safer managed Turnkey properties and use the other $300k for your rehab Brrrr business. Treat your primary as part of your real estate portfolio and the answer to if it's a liability or asset will reveal itself in the math.

Rob Beardsley

Rental Property Investor · New York, NY · Member since 2017 · 300 posts · 168 votes

8y

Originally posted by @David Bardwell:

@Kent McDaniel. I think you're right. If your home is not generating income, it's costing you. I presume you still pay taxes and insurance? If you want to accelerate your passive income, tapping into the equity of your paid off home may be a great way to reap the rewards of the hard work that went into paying it off in the first place. Otherwise it's not much different than keeping your money in a low yield savings account. Think about it... The appreciation (or depreciation) is going to happen regardless. Why not have the equity work harder in the meantime?

Agreed!

Chris Youssi

Rental Property Investor · Caledonia, IL · Member since 2015 · 290 posts · 213 votes

8y

Originally posted by @Chris Martin:

I challenge anyone who says that a free-and-clear personal residence is a liability to say, truthfully, that on a PFS (Personal Financial Statement) that they would claim their F&C residence in the liability column when calculating their net worth.

I don't think so...

Balance sheet != Income Statement

Im all in with you on this one Chris. When I fill out my PFS I certainly don't place my home paid for free and clear as a liability that's absurd. One cannot place a price tag or monetary value on owning your personal residence free n clear as it's about peace of mind. HELOC is the way to go in case an opportunity presents itself all the while knowing you should be able to refi your new purchase relatively quickly. My thoughts

Bobby Nilsen

Rental Property Investor · Los Gatos, CA · Member since 2017 · 124 posts · 131 votes

8y

@Kent McDaniel The house, with no mortgage, is an asset. The taxes, insurance, utilities, etc. are liabilities. If the house had a mortgage it’d be a liability.

Account Closed

Santa Clara, CA · Member since 2018 · 100 posts · 71 votes

8y

@Kent McDaniel

I think its great you have no mortgage on your home. It is definitely an asset. You are using this asset to enjoy your personal lifestyle and I think some pleasures in life are just that, pleasures and equating it to money is probably unwise.

Yes you can always generate income on it but pulling out by way of HELOC, that's your personal choice and the risk tolerance you have.

Mark Nickoson

Rental Property Investor · Dayton, OH · Member since 2015 · 79 posts · 85 votes

8y

Applying the definitions given in RDPD, your home is a liability. It takes money out of your pocket. I am a little surprised at the discussion thread though... you could get a mortgage and make use of the capital, but any time you incur debt, there is RISK. Why don't we think of our holdings in two categories personal and investments. I don't want to risk my personal assets including my home, because if there is a downturn in the economy and people struggle to make rent payments I don't want to be leveraged so much that I cannot make my own mortgage payments and have my house foreclosed. Do you?

Joe SplitrockPro Member

Moderator

Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes

8y

@Kent McDaniel if you completed a personal balance sheet, it would be an asset. Just like your (paid for) car would be an asset and even your clothing/furniture is an asset. All that means is it has value beyond what you owe on it, so you could sell it and get some money.

Rich Dad Poor Dad is just meant to change your thinking so you view something as an asset only if it produces income. He is trying to discourage people from looking at a home as an investment. As others point out, even if your home is paid for, maintenance, utilities, insurance, taxes are still continued expenses.

Of course you need to keep in perspective that you always need a place to live. If you were renting an apartment, that would be a monthly liability. Even when you are house hacking, people claim to live for "free", there is still expense. The unit you are living in could be rented to someone else and would otherwise produce income. So you are still paying, only in the form of lost income. That is OK. We all need a place to live.

Using the equity from your paid off home to purchase other rental properties is a great way to expand your investment portfolio. It sounds like you learned the key lesson here, which is to acquire income producing assets.

Jim K.

Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes

8y

@Kent McDaniel

So as you can see, there's a lot of disagreement among real estate investors and would-be investors about the nature of assets and liabilities. But really, it's all a squabble about technical labels.

The basic question you need to answer for yourself is pretty simple: "Is my house helping me accumulate wealth?"

The business theorist Dr. Thomas J. Stanley in his 1997 book "The Millionaire Next Door" argued persuasively that spending a lot of money on a house and living in an upscale neighborhood was one of the main things hindering ordinary people from putting money aside. He was still beating the same drum in 2009 in his last book, "Stop Acting Rich." Presumably, his daughter, who is continuing his research and will be putting out her own book soon, is going to tell us more of the same thing with updated research results.

Living in a "nice" house comes with the financial burden of a large mortgage, a lot of taxes, and awfully high maintenance costs, and even after the mortgage is paid off, the taxes continue and the upkeep relentlessly rises. There are other insidious costs as well. A nice house is situated in a nice neighborhood, and the neighbors have certain expectations that most people end up conforming to. When they see their neighbors driving late-model, expensive luxury cars, they tend to ditch their paid-off entry-level Toyotas and Hondas for a huge car payment to drive a new Lexus or Acura. They stop buying their groceries at Aldi and the bargain supermarkets of their area and move up to Trader Joe's and Whole Foods. The kiss of death to any dreams of lasting wealth really comes when they start sending their kids to private schools.

I've lived this myself. I've told this story before here on BP, but here it is again.

In 2007, i moved to the USA from Athens, Greece, selling my 2-bedroom apartment there for a 2-bedroom condo in one of the posher 'burbs of Pittsburgh. I live in a townhouse development north of the city, near the most upscale mall in the county. There's a pool and tennis courts. Cable is provided. The maintenance team cuts the grass and cleans the snow. And all for a low, low maintenance fee of $400 a month. The condo is 1450 ft2 on three different levels.

I now plan on selling this condo and moving to a large duplex my wife and I bought for less than a third of the price of the condo in one of the poorest urban areas of the county. Each of the two two-bedroom apartments is 1760 ft2, and there's a full basement divided in two that adds an additional 880ft2 of storage space to each apartment. It's much closer to my wife's job, and the crime levels of the immediate neighborhood similar, mostly because the duplex is next to a police station. The lawn is roughly the size of a postage stamp and I will need to shovel the sidewalk myself in the winter.

The tony townhouse is 1970's tract-built garbage. The whole development is falling apart. I called it a white-trash house the day I first saw it. The duplex, on the other hand, was custom-built for an heiress in the 1920s, remodeled and sold in 1945, and was poorly maintained and updated by a fool and his family from 1951 on as the neighborhood inexorably deteriorated from its high point in the 1940s.

I've managed to get the county tax assessment for this duplex down by 33%. I'll be renting out half of it and living in the other half. I expect the tenant's rent to cover all our own housing expenses.

All in all, when we put it all down on paper, we calculated that moving out of the condo and selling it to cover our complete current debt load, renting out half the duplex, and living in the other half, will allow us to save over $40,000 yearly in various loan payments, utility payments, and tax payments. I'm being conservative with my estimates of the proceeds of the condo sale. We may also have enough left over to buy another cheap rental property near the duplex free and clear.

So here's a question for you, Kent. Is your paid-off "wonderful old house that looks down on the Columbia River" helping you generate more income or transform that income into lasting wealth? Or is it keeping you from doing those things?

3 Reply

Ned CareyPro Member

Moderator

Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes

8y

Rich Dad is WRONG!!!

@Kent McDaniel The idea that something is only an asset if it generates money is not only technically wrong, it is very short sighted thinking. Robert K. has some pretty smart and interesting perspectives but his "Your home is not an asset because it doesn't generate income" is just off the wall.

First You will always have a living expense. Is Kyosaki saying that you are better off paying rent, than not paying rent? Even by his own standard your home is increasing in value over time. In other words it is bringing in wealth (which can be converted to cash). It is also saving you the money of rent. So despite his claim, your home is generating cash (wealth)

Regarding your second question, should you put your equity to work for you, has two considerations

What works mathematically
What works for you given you financial position, tolerance to risk, and personal philosophy.

If you can borrow against your home at 6% and invest that money at 10%, mathematically that makes sense. However if every little hiccup in your investment gives you nightmares, and you can't sleep for fear of losing your home, Then it doesn't make sense for you.

Sometimes I read stuff and people act like debt is all or nothing. No, you can use debt in a conservative way. You certainly don't need to max out your debt. Larger margin deals, mean there is more room for mistakes. This means less risk for any borrowed money.

Kent McDaniel

Flipper/Rehabber · Cathlamet, WA · Member since 2018 · 1 post · 0 votes

8y

@Jim K. First of all...thank you ALL for the very thought provoking responses. I apologize for coming back a little late to respond as I was having trouble with the app. Should all be good now. This gives me a thought to consider, but as a first pass, here are my thoughts: My “day job” pays well, and I’ve been with the company long enough (24 years) to feel confident in their financial and market stability, and my place within the organization. For that reason, I would feel comfortable taking on a little more risk compared to other scenarios. I like the idea that my home is an asset when considering the amount I am saving compared to renting or having a mortgage (I am trying to respond to everyone at once here, so forgive me for not referencing the name. I’m just going from memory after reading the thread). That said, it seems that a HELOC is a good option, if only to have it “at the ready” in case a good opportunity presents itself. Someone also mentioned a homestead exemption, which I have never heard of...more homework for me; thank you. 😊 I’m going to post another topic regarding foreign invenstment where I have a couple pieces of land that is ideal for tropical VRBO vacation rentals, but I haven’t built the units yet. Thanks again to everyone! You have guaranteed me many sleepless nights considering and learning about all my options and different ways of looking at my situation. That‘s just my obsessive nature coming out. 😊

Joshua Feit

Atlanta, GA · Member since 2014 · 240 posts · 130 votes

8y

Hi there!

It becomes an asset when you leverage it! I would take out a HELOC against it, which you then can use to purchase properties in 'cash', then rent them out and refinance with conventional mortgages. Now the HELOC funds are available again, and you can go get more. Suddenly, you have unlocked the equity from your home, and it is helping you acquire multiple rentals over time. Nice, nice, nice!

Immanuel Sibero

Carrollton, TX · Member since 2015 · 415 posts · 371 votes

8y

@Kent McDaniel

Congratulations on your success. RDPD is a great book and I enjoyed reading it. I'll comment on your questions in reverse order because I want to save the first question for last as it is more of a philosophical question.

As mentioned be another poster, debt is a two edged sword in that it makes good things better and bad things worse. An example of good use of debt is to finance another investment, an example of bad use of debt is to cover living expenses. The test is whether the use of debt increases or decreases your net worth. You should generally take on debt when it increases net worth because, after all, that's wealth building!

Is my personal residence a liability or an asset? It's a trick question because it limits the answer to the two choices :-). I like to start with - "investment is a means to an end and not an end in itself". We are so wrapped up in investing (i.e. analysis, due diligence, performance measures, etc.) that we end up investing for the sake of investing (i.e. I invest to make money and/or to build wealth, period). However, I see investing as more than that, I see it as a money-making, wealth-building tool (i.e. "means") that I can exploit to achieve my objective which is a lifestyle of my choosing (i.e. "end"). My personal residence is a house with a pool and an over sized backyard because I have a wife and little girl who love the outdoor and swimming (well, I do too). I bought the house never thinking it was an investment nor an asset or a liability. Rather, it was a lifestyle choice to share with my family. Is it a liability? Well I will have to pay taxes, insurance, and repairs, so I guess it is a liability. Is it an asset? Well I live an area that I like, I get to build memories with my families, my little girl is a happy child in a good school district, so I guess it is an asset. But you see, to me the point is, my personal residence is NOT an asset NOR is it a liability and that's because it is a lifestyle choice. Other examples of lifestyle choices are a boat, toy sports car, vacation condo, etc. If I were to limit my life to investing only then I suppose I can see why I would be forced to figure out where to put my lifestyle choices in my balance sheet/income statement. But my life is much more than investing, my house lies outside of my investment domain so it does not belong in my financial statements. It's neither an asset nor a liability!

I did warn you this was a philosophical question, didn't I? :-)

Cheers... Immanuel

Anthony Cettina

Investor · Jacksonville, FL · Member since 2018 · 18 posts · 5 votes

8y

@Kent McDaniel There is a ton of great information here in these questions and responses! I would ask myself, “If money brings me a sense of security and freedom, which use would add to that feeling and which would alter it?” If growing and expanding your means is empowering for you, then why not take advantage of the equity? If risking your primary residence to do that makes you uneasy, stressed-out, or uncomfortable, then why create those unwanted feelings? Just some food for thought Best of luck! -Anthony