With the Australian property market continuing to go gangbusters it’s pretty hard to convince anyone that their home is not an asset – particularly if they’ve bought into a choice suburb in a major city like Brisbane, Melbourne or Sydney. But that’s exactly what top financial educator Robert Kiyosaki says. And I think you should take time to find out why.
Robert is the author of the Rich Dad, Poor Dad series of books that have sold over 1 million copies in Australia and have hit the Business Week, New York Times, Wall Street Journal and other bestseller lists in the United States. Robert loves making money investing in real estate but he thinks you’re mad to put all your money into buying your own home. Why? Because even with price appreciation, when you sell, your own home is a financial liability that can cost you dearly over time.
As Robert says, there are two key words to understand: asset and liability. “An asset is something that puts money in your pocket,” he says. “A liability is something that takes money out of your pocket.”
By that score, your own home is usually a liability. It costs you more than it returns. Your goal in life should instead be to acquire assets – in shares and other securities, real estate or by building businesses – that will generate income while avoiding liabilities.
A great test for whether you’ve built up the sort of passive income that assets bring is to ask yourself this: “How long could I survive if I stopped working tomorrow?” For most wage earners with a mortgage, the answer is they’d have to sell that lovely house, and fast!
“One dad thought his house was an asset, the other dad thought it was a liability.”
“I remember when I drew a diagram for my dad showing him the direction of cash flow. I also showed him the ancillary expenses that went along with owning the home. The bigger home meant bigger expenses, and the cash flow kept going out through the expense column,” Robert writes in Rich Dad, Poor Dad.
Putting the majority of your wealth into a home – as most Australians do – costs a lot of money in interest payments, utilities, maintenance, etc, and in some cases property taxes. It also carries significant opportunity costs. As Robert says:
- When it comes to houses, I point out that most people work all their lives paying for a home they never own.
- They don’t receive tax breaks for their own home, as they can for an investment property, and they pay for other expenses with after-tax dollars. Even after they pay off their mortgage.
- Property taxes. My friend’s parents were shocked when the property taxes on their home went to $1,000 a month. This was after they had retired, so the increase put a strain on their retirement budget, and they felt forced to move.
- Houses do not always go up in value. I still have friends who owe a million dollars for a home that will sell today for only $700,000.
- The greatest losses are those from missed opportunities. If all your money is tied up in your house, you may be forced to work harder because your money continues blowing out of the expense column, instead of adding to the asset column, the classic middle class cash flow pattern.
This opportunity cost is very real and takes three forms, Robert argues:
- Loss of time, during which other assets could have grown in value.
- Loss of additional capital, which could have been invested instead of paying for high-maintenance expenses related directly to the home.
- Loss of education. Too often people count their house, savings and retirement plan as all they have in their asset column. Because they have no money to invest, they simply do not invest. This costs them investment experience.
“I know that for many people, it is their dream as well as their largest investment,” says Robert. “And owning your own home is better than nothing. I simply offer an alternative way of looking at this popular dogma.”
I can honestly say that listening to Robert has changed my life and I believe that he can help change yours.