Real estate: Asset or liability?
February 17th, 2009 | by mbhunter |Flexo takes issue with Robert Kiyosaki’s definitions of asset and liability:
An asset is something that puts money in my pocket.
A liability is something that takes money out of my pocket.
I can see Flexo’s point in that Kiyosaki is recasting the definition of the words. The proper financial terminology would say that:
An asset is something that is owned, while
a liability is something that is owed.
I live in a house which has a mortgage against it. I don’t really own the house yet, because I still owe tens of thousands of dollars on my mortgage. (Even after that, I can readily find out who the real owner is if I fail to pay my property taxes.) The home itself has some value. I can sell it to someone for money. It’s an asset in the financial sense of the word. The mortgage loan is owed to the bank. It’s a liability in the financial sense.
At the same time, though, I can see the merit in Kiyosaki’s definitions, as they’re more practical. The financial definitions deal with cash value, while Kiyosaki’s deal with cash flow.
In terms of cash flow, my mortgage is of course still a liability for me. But, my house itself is also a liability. Maintaining it, removing mold, keeping it warm, keeping it clean, keeping it looking pretty, keeping it dry, etc., take a lot of money. A house deteriorates just like anything else if it’s left alone.
Going back to the financial definition for a second, I can rephrase this statement by saying that the value of my asset, my house, will go down if I don’t take care of it. It costs me each month so that the value of the asset isn’t affected by my carelessness.
In the cash flow sense, the house would be an asset only if I were renting it out for more than it cost me to maintain it. That is, only if it put money in my pocket.
I’m not sure that clears things up at all. If anything, it makes things more confusing. If so, then I’ve accomplished something. 
Seriously, though, I do like Kiyosaki’s definitions because they bring the focus to the cash flow. If you buy a boat, you have an asset, but while you own it it’s a huge liability — unless you get the credentials to boat people around for hire, in which case it becomes an asset. Thinking about purchases this way brings the spotlight to the lifetime cost (or lifetime earning potential) of an item. Maybe fewer people would buy boats if they knew that BOAT stands for “bring on another thousand.”
Anyway, what are your thoughts?
20 Responses to “Real estate: Asset or liability?”
By Flexo on Feb 17, 2009 | Reply
Great thoughts! I agree that Kiyosaki has points for practicality, but shouldn’t our goal be reducing confusion? An RK fan who goes to an accountant to get help with his or her taxes will be laughed out of the office if he argues that the house (whether a live-in or investment property) is a “liability.”
By mbhunter on Feb 17, 2009 | Reply
Flexo: Well, the accountant, if she were smart, might say: “You’re right, your house is a liability, but let’s do it my way just to keep the IRS happy.”
By Millionaire Acts on Feb 17, 2009 | Reply
Hi, I wrote the same article a few months ago and I thought of posting here as a comment. Look at how people reacts. Great thoughts!
http://www.millionaireacts.com/517/house-asset-or-liability.html
By Mark on Feb 17, 2009 | Reply
The house is also an asset even if you DON’T rent it out, because it eliminates a cash outflow (rent). Is eliminating a cash outflow equivalent to generating cash?
In the long term, owning the house should generate cash – save rent and appreciate (we hope!).
By Best CSS Gallery on Feb 17, 2009 | Reply
Interesting post, thank you
By Kimberly on Feb 17, 2009 | Reply
“Asset” and “Liability” are balance sheet terms. What Kiyosaki describes and you expound on in your last paragraph belong on the income statement. “Income” puts cash in your pocket and “Expenses” take money out of your pocket.
Your house is an asset that generates lots of expenses.
By Roger on Feb 17, 2009 | Reply
I can see Kiyosaki’s points; it can make sense to view possessions as assets or liabilities on the basis of cash flow. (Particularly if you are investing your money primarily for the purpose of creating income, as Kiyosaki advocates.) Being aware of whether your house (or other assets) is bringing in money or requires an outflow of money is useful knowledge for budgeting and financial planning.
BUT, trying to do a wholesale rewrite of financial definitions seems like a heavy-handed way of making the point. At the least, it leads to discussions like this over the difference between financial assets and cash flow assets. It’s probably best to just use the financial definitions, and talk about ‘cash-flow generating properties’ rather than Kiyosaki-definition assets.
By David on Feb 17, 2009 | Reply
Funny timing. I just read that chapter of Rich Dad Poor Dad again yesteday.
I like RK’s definition, because it challenges the widespread belief that your house is your biggest investment in life.
As far as an investment goes, it’s not that great (this assumes that you’re going to live in the house you bought). It may outpace inflation, but it may not appreciate any faster than stocks, and it still costs you money regardless of what the value is..
On the other hand, a traditional investment may lose value over time, but it wouldn’t cost you anything just to keep it.
I think where the definition falls a little short is that some people may take it as “Ok, then I should always rent”, when really, it’s not meant to be applied to the rent/buy decision. That decision should be made on a case by case basis.
By Jeff@StretchyDollar on Feb 17, 2009 | Reply
I have to say I think this is one of those things that can be taken with a grain of salt. I like the points you made in your post. I think in the long run what is a liability (the house) can become an asset if properly managed.
By T.Derscheid on Feb 17, 2009 | Reply
I think it’s funny that you picked the boat as your example. In Kiyosaki’s Cashflow 101 boardgame, most of the cards you draw are investment opportunities of the other-people’s-money-financing variety. A few are millstones around your neck, and the worst card of that sort in the game is The Boat.
By Steve on Feb 18, 2009 | Reply
If we all made decisions based on their effects on cash flow, we would all be leasing cars. I totally believe in renting in today’s market, but I still disagree with RK and his redefinition of asset.
By commercial real estate on Feb 19, 2009 | Reply
Funny timing. I just read that chapter of Rich Dad Poor Dad again yesteday.
By Scott @ The Passive Dad on Feb 19, 2009 | Reply
I feel like a groundskeeper working for a home that keeps losing value. I’m starting to think it’s time to look at an investment property to create some positive cash flow that can offset our sinking home asset.
By James on Feb 20, 2009 | Reply
A great analysis. Ultimately thought, I think we need to take a broader view of homeownership.
1) Kiyosaki is correct in that it creates an obligation to pay, but for most people the choice is mortgage payments or renting, so either way you’d have to pay. In this case, its not clear that the assertion that “your home is a liability” is useful.
2) Homeownership is positively correlated with networth. So, Kiyosaki will have to explain why it is that home ownership INCREASES your wealth. If it were a liability, wouldn’t its effects be to DECREASE your wealth?
Ultimately, we may be better off if we real Kiyosaki not for technical or instrumental advice, but rather for inspiration.
By Mr. ToughMoneyLove on Feb 21, 2009 | Reply
Kiyosaki is like Suze Orman. He is an expert in selling books and seminars and not much else. We are his “assets” because we keep buying them.
By Andy @ Retire at 40 on Feb 22, 2009 | Reply
I guess I look at these things through the long term. Yes, I have to service the debt on my house and I have to fix things up, paint things and keep things nice so it is costing me money to have it.
Hopefully though, in the long term it will end up being sold for more than the price I paid for it and more than all the other money I have put into it in the meantime.
Therefore for me, it’s an asset that is owned but might end up being an asset which also puts money into my pocket. It’s all about time.
By Carlton on Feb 22, 2009 | Reply
I think it is a point of perspective on how we spend our money and what we want to spend it on. If it’s important to live in a house and enjoy all the tangible and intangible things that a home typically provides then it is an asset to our way of life. If my priority it to travel and see the world then a house with all its monetary upkeep; mortgage, bills, repair, taxes etc. would become a liability to my desire to only want to travel and not be anchored to a fixed point on this globe.On the other hand even an eagle has to stop, build a nest and …on the other hand some indians were cliff dwellers others lived in a tent. It’s about what makes us happy. What makes RK happy? What does he own that does not create a cash flow? Car, Boat, Clothes, I’m sure we all do things that the next person would not spend their money on. It’s not all about accumulating wealth. I read some place about a person’s wealth, it went something like this…” add up everything that money can’t buy and death can’t take away and that is a person’s true wealth” maybe some of you have heard it said other ways.
By repossessiongirl on Mar 18, 2009 | Reply
Hey there – I personally own and managed over 50 rental properties. I take care of them , and my tenants. I owe the mortgage companies BIG TIME!!!! I do make a monthly profit of between £3000 – £5000. In ten years time, I will sell half of them to pay off the other half, and I will be in a situation of complete ownership. I know my assets.
By Russ on Aug 16, 2009 | Reply
It’s really simple, you choose to either make a profit, or generate an income. A house can generate profit or income, depending on if you live in it or rent it out. It also depends on how you maintain and/or improve it and how fast you do all this. Whether you qualify it as being an asset or liability makes no difference, as long as it’s eventually going to put money in your pocket…or take money out, the balance sheet, cash flow, all depends on your current financial ability to pay whatever mortgage and fixed costs (electric, phone, maintenance, etc.) are involved. Every rich person did not start out that way in life, except people who inherit (ie. Mike, Rich Dad’s son), hence not everyone has to work for their money, but only 8% of world population are millionaires…lol Good luck…or should I say, learn and work at it, ’cause nothing comes easy unless you’re selling your looks
It’s all about how you work and how you manage finances.
Russ
By Cash Guy on Oct 7, 2009 | Reply
Here’s a better way to think of the Asset VS Liability of Home Ownership.
If I had $250,000 in CASH I would NOT buy a house.
Instead I would simply put a security deposit down and pay rent to live in a luxury high rise building on the water with FULL maintenance and No Property Tax or other liability associated with owning a property.
This would leave a tremendous amount of CASH for me to play with in other FAR MORE LUCRATIVE investment ideas than owning a house.
Even if I simply put say $200k of the money into a 5% money market fund I would earn a good amount of money on my money each year.
NOW lets assume I do what 98% of Americans would do, they would either put a down payment on a house and pay interest on the mortgage, taxes, insurance, upkeep, full maintenance bills, etc. etc. etc.
OR they would put the whole $250k to purchase a house with CASH and own it but the problem is all your $$$ are tied up in the house so now you own a house but your still going to have to pay Taxes, Insurance, Maintenance, etc. etc. and now your broke because all your $$$ are tied up in the house…
It’s far better to RENT and have money to play with and invest than to OWN a house and be BROKE.