One of the Cruelest Hoaxes of our Time

[Homer]

The average american, who does not think too deeply, firmly believes that his home is an appreciating asset. He buys it with the expectation that he will always be able to sell it for even more than he paid. Recent events have proven the folly of that belief.

Politicians prattle about "restoring value to america's homes." What horsepoop! There is no logical reason why a house should appreciate. They deteriorate, they get old, things break and/or wear out, and eventually they fall down if not maintained.

Folks have trouble grasping the fact that the house is the same house they bought, just older. It is the currency with which they purchased it which has changed its value.

It saddens me to see so many lose because they bought an overpriced house, which they couldn't afford in the first place, because they were lured in by the prospect of more dollars. They, alas, believe that they are "prosperous" if they have more dollars and fail to comprehend that the dollars are worth less if there are more of them.

What a shame, and what a sham!

[maplesilverbug]

I saw a show a while ago that presented a Euro scientist of something...He did a study/analysis of centuries (100's of years) of house/dwelling prices. In the end he found that house prices rise approximately 1% per year.

"Ownership" is definitely a N.American phenomenon. Even I regret buying my house (some 20+% below market value at the time). I would have been much further ahead financially had I just kept renting my very nice apartment in an even nicer neighourhood. I would have had a lot more time on my hands, too (ie. no "renos").

C'est la vie!

[pmstacker]

Well imo the problem is people do not know the difference between an asset and a liability. A home is a liability, however imo buying a house is better than renting. For the simple fact that while renting you are still paying a mortgage, its just under someone elses name and in the end when you leave and they are done with the home, they can sell it and get back a good chunk of the money put into the mortgage. Right now i only have 1 rental property that started out as a place we had to have because we outgrew our home office, but as we downsized we opted to put it on the market. The only problem was there are about 80 homes in that price range in a market of about 30k people, so basically the market is saturated. We opted to rent it out and have done so for about the last year. A rental property is an asset, the home you live in is a liability. The rental home brings in money every month, our home we live in costs us money every month. Wether we rent or own makes no difference, we still pay by the month to live in our home, so buying makes sense because you get to keep some of that money and put it twords another house down the road, with renting you only get back your deposit, but only if the landlord deems it is appropriate. The problem is these stupid shows on hgtv, they show people buying a home for 150k 2 years ago and then reselling them for 500k 2 years later with no rennovation. Then when people only make 100k or so on their home they are dissappointed. This to me is sheer stupidity. You gained by living in the home, and if it also gains market value, you win-win. But these morons on tv get pissed when they don't get rich by selling their home. I just cannot wrap my mind around what they could be thinking. They have been trained to think of thier home as their asset, not a liability. If you think of your home as your biggest asset, then you have big problems, plain and simple. Retrain your mind and you will be much better off.

[SeekrBrnEvryMin]

As you FRN erodes in value, your mortgage will become less of a liability over time.

Conversely, if you rent, your rent will increase.

Current tax considerations now make it cheaper for me to own, even with maintenance expenses.

Depends on if you're going to be moving soon or not. But it's alway been like that.

[pmstacker]

Theres maintenence expenses with renting also, but its tied into your monthly payment. Don't think for a minute that the person renting your home to you is not making money off you. There is 1 reason for having rental property, to make money, period.

[theo68]

[QUOTE=pmstacker;59975]Well imo the problem is people do not know the difference between an asset and a liability. A home is a liability,

A rental property is an asset, the home you live in is a liability. The rental home brings in money every month, our home we live in costs us money every month.

Actually the home you live is in fact an asset to the extent you have equity in it. Just because you don't get income from your home and you have to pay upkeep on it, does not make it a liability. The fact that you own it and get value out of it (i.e. living in it) makes it an asset. Having said that the fact that most property owners (including rental property owners) have to pay hundreds of dollars a month in property taxes, makes it act like a liability too. These taxes literally give the government a claim on your property in that they can take your home if you don't pay them. I've always felt that this is legally questionable if not unconstitutional in that it erodes our private property rights.

"Folks have trouble grasping the fact that the house is the same house they bought, just older. It is the currency with which they purchased it which has changed its value." - Homer

Homer has a point here. The mistake that home owners make is that they think a home is an appreciating asset when in fact they have a depreciating asset, especially when you take inflation into account. So when home owners spend money on repairs and updates they are simply trying to maintain the value of their home (their asset); they are not paying off a liability.

[pmstacker]

Like i said people don't know the difference between an asset and a liability. Might want to read Rich Dad, Poor Dad, then let me know ;)

[pmstacker]

http://www.mischel.com/diary/2006/01/30.htm Heres a link that sums up what i have been saying. He also refers to the Rich Dad Poor Dad book ;)

[theo68]

Your House Is Not An Asset

It's surprising how many people view their cars or their houses as assets. "It's worth $25,000," a friend said of his new car. I didn't have the heart to tell him that although he paid $25,000 for the car last year, he'd be lucky to get $18,000 for it today. If you view assets and liabilities in the traditional way, he's a few thousand dollars in the hole with an outstanding loan balance of about $21,000.

Houses are a little bit different in that a house often is worth more than you paid for it, and unless you got one of those negative amortization loans it's almost certainly worth more than the outstanding mortgage balance. In the traditional sense, then, you're in the black: disposing the asset will more than erase any associated liability.

The traditional way of looking at things defines an asset as something that you can convert to cash. A liability is money that you're committed to paying at some point. House, car, boat, home furnishings, etc. are assets. Mortgage loans, student loans, credit card balances and such are liabilities. If you add up the assets and subtract the liabilities, you obtain a number called "Net Worth"--the amount of money you'd get if you sold everything and paid off all of your debts. Not surprisingly, a very large number of people--even "successful" people--in the United States have a negative net worth.

Net worth is a nice pretty number to figure out, but it's almost meaningless. It's a fictional number that's usually based on over-valued assets and unreasonable assumptions. And it's a worthless number because you can't spend your net worth. In most cases, the best you can do is borrow against it.

A more realistic way of viewing things, popularized by Robert T. Kiyosaki's book Rich Dad Poor Dad, is cash flow. Forget about what things are worth. Figure out instead where the money goes. How much money comes into your bank account every month and how much money goes out. From a cash flow perspective, traditional assets and liabilities are meaningless. In this alternate way of looking at things, an asset is something that puts money in your pocket and a liability is something that costs you money.

By this definition the only asset that most of us have is our daily job. Your house, even if you have it paid off, is a liability. Why? Because it still costs you money every month for taxes and insurance. Your car is a liability, requiring a loan payment, insurance, gas, registration, and maintenance. Almost anything you buy is a liability, or at best neither--that is, it costs you nothing to maintain.

The trick to getting ahead is to increase your assets and reduce your liabilities. Most of us increase our assets by putting our money in savings accounts, certificates of deposit, or mutual funds that invest in dividend paying stocks. Rental property is another popular asset in which to invest, but remember that by our definition it's only an asset if the monthly income from rents, plus any tax advantages, is more than the monthly outlay for the property. The equity you're building in the property with each payment doesn't count because it's not money going into your pocket.

I'll be the first to admit that this isn't the most sophisticated way to look at things, and that any second year accounting student could poke holes in some of the reasoning. Many people will dismiss it as being too conservative and short-sighted because it doesn't take appreciation into account. But that's okay. I've seen all too many people with high net worth figures work their way through bankruptcy court because their cash flow situation became untenable. I'd rather maintain a positive cash flow and treat any asset appreciation (in the traditional sense) as a bonus.

By the way, I wasn't terribly impressed by Kiyosaki's Rich Dad Poor Dad. Powerful as it is, the cash flow method of looking at assets and liabilities is the only "new" idea in there, and it can be explained in a few short paragraphs. The rest of the book is entertaining but not very enlightening. That said, it's probably worth the price (under $20) as a gift to your children or to a friend who is struggling with finances."


Hmm. . .how can I put this? My house (if I own it) is an asset. An asset is something that:

A. You own
B. Gives you utility either through cash flow or personal usage
C. You can exchange for money or another asset

This definition is backed by about three hundred years of scholarship. The fact that somebody wrote a trendy book disagreeing with that definition changes nothing. I don't want to quibble, but we need to use words correctly if we want to communicate.

The author of your article doesn't demonstrate a terribly deep understanding of economics and accounting because he views direct cashflow as the only form of utility. It is not. The fact the my house keeps me secure and keeps the rain off of my head means it has utility. The fact that my car gets me to work everyday provides me with utility and BTW helps me make money (i.e. cashflow). That these assets cost money to maintain is irrelevant. They still have market value. The author probably makes the assertion "Your house is not an asset" to draw attention to his ideas.

Having said all of that it can be argued, as I think your book and article do, that in order to grow wealth you should obtain assets (like rental property) that have a positive cashflow. I agree with that; however, I would further argue that my house and my car can be among those "positive cashflow assets" in that they help me make a living albeit indirectly.

[silverbuyer]

Everyone I know has made tons of money over the last 30 years of being in real estate. Those Civilians and Amateurs that came in on the tail end of this last market didn't do so well. I have been buying homes for 30-50% of current, not historical values for the last two years - oh gee I'm losing money.

[SeekrBrnEvryMin]

A house you own is both an asset and a liability, and you have to be objective.

There have been housing busts and booms before, just not so wild as the recent swings.

IF YOU ARE GOING TO STAY PUT FOR OVER 5 YEARS: Compare rent with a house payment (principal, interest, taxes, and insurance). CALCULATE HOW MUCH YOU'LL SAVE IN FEDERAL TAXES. This is a big deal. If you intend to stay put in your town for a long time, INFLATION, even at modest rates, IS GOING TO SHRED YOUR MORTAGE TO BITS. That, with tax savings, is how you get weathly in real estate, and is Kiyosaki's (also a silver fan) point in Rich Dad.

If you want to know what you're house is really worth, calculate the replacement cost. Your insurer knows, so should you. Land is based on comparable sales, your local tax appraiser has calculated it, and it's pretty stable. Then depreciate the building and add the land value. That's what your spread is worth.

Buy low! Here you have RECORD LOW INTEREST RATES AND A DEPRESSED MARKET.

FOR YOU RENTERS: If you need to stay mobile, don't buy! You are right!

If you dig in and do a serious cost analysis, and take FEDERAL TAXES into consideration, you MIGHT figure out how so many people end up with rental cash cows, even in a down market like today!

[pmstacker]

For god sakes noone said anything about doing well in real estate, please read the other posts in this thread before answering.

Af for your home being an asset, i would argue against it, but thats the problem i was pointing out, too many people view it as such and lose their ass when things turn sour, such as the latest real estate crash. I'm into real estate in the form of rental homes. I also own my home, but view it as a liability due to the fact that it is not liquid and if i sold it i would still need a place to live, thus giving me another liability. A home imo is a liability that you get to use while you are making payments, and build equity, but don't confuse equity with an asset, they are not the same. I don't care what people have been teaching for 300+ years, theres a good chance they have no idea what they are talking about either. How to take care of your finances is not taught in school, most people just assume you get a job and pay your mortgage, but thats all. You really need to read the book rich dad poor dad, it would do everyone some good, and its a pretty quick read. Its one of the few books i can say has changed the way i look at money. Robert Kiyosaki does a good job of making the concept of money something everyone can grasp, you don't even need to be highly educated to understand the concepts. Anyhow wether you read it or not makes no difference to me, and wether you continue to assume your home is an asset is not my problem, but if anyone has read my thoughts and the book i have recommended and still thinks their home is a liability, then thats their fault. Anyhow i'm done debating the concept, so take care.

[pmstacker]

A house you own is both an asset and a liability, and you have to be objective.

There have been housing busts and booms before, just not so wild as the recent swings.

IF YOU ARE GOING TO STAY PUT FOR OVER 5 YEARS: Compare rent with a house payment (principal, interest, taxes, and insurance). CALCULATE HOW MUCH YOU'LL SAVE IN FEDERAL TAXES. This is a big deal. If you intend to stay put in your town for a long time, INFLATION, even at modest rates, IS GOING TO SHRED YOUR MORTAGE TO BITS. That, with tax savings, is how you get weathly in real estate, and is Kiyosaki's (also a silver fan) point in Rich Dad.

If you want to know what you're house is really worth, calculate the replacement cost. Your insurer knows, so should you. Land is based on comparable sales, your local tax appraiser has calculated it, and it's pretty stable. Then depreciate the building and add the land value. That's what your spread is worth.

Buy low! Here you have RECORD LOW INTEREST RATES AND A DEPRESSED MARKET.

FOR YOU RENTERS: If you need to stay mobile, don't buy! You are right!

If you dig in and do a serious cost analysis, and take FEDERAL TAXES into consideration, you MIGHT figure out how so many people end up with rental cash cows, even in a down market like today!

The problem is banks don't want to give loans right now, to anyone, superb credit or not. Banks are telling auto dealerships to not even send them any apps, thats how bad it is. They won't even loan money short term (5-7 years) at nearly double the interest rate. Sure right now is a great time to scoop up any deals you can get, but only if you can obtain financing or come up with the funds to pay cash. Thats pretty much a rock and a hard place.

[maplesilverbug]

I bought a house only so I would have a backyard in which to bury my treasure.

House, no house; assest, liability...we're all dead in the end so it doesn't really matter either way!

Being able to enjoy what you have while you have it is about the only asset worth anything.

[theo68]

For god sakes noone said anything about doing well in real estate, please read the other posts in this thread before answering.

Af for your home being an asset, i would argue against it, but thats the problem i was pointing out, too many people view it as such and lose their ass when things turn sour, such as the latest real estate crash. I'm into real estate in the form of rental homes. I also own my home, but view it as a liability due to the fact that it is not liquid and if i sold it i would still need a place to live, thus giving me another liability. A home imo is a liability that you get to use while you are making payments, and build equity, but don't confuse equity with an asset, they are not the same. I don't care what people have been teaching for 300+ years, theres a good chance they have no idea what they are talking about either. How to take care of your finances is not taught in school, most people just assume you get a job and pay your mortgage, but thats all. You really need to read the book rich dad poor dad, it would do everyone some good, and its a pretty quick read. Its one of the few books i can say has changed the way i look at money. Robert Kiyosaki does a good job of making the concept of money something everyone can grasp, you don't even need to be highly educated to understand the concepts. Anyhow wether you read it or not makes no difference to me, and wether you continue to assume your home is an asset is not my problem, but if anyone has read my thoughts and the book i have recommended and still thinks their home is a liability, then thats their fault. Anyhow i'm done debating the concept, so take care.

Since you put yourself and your book above 300 years economic study I think we can all benefit from your knowledge and insight. Would you and Mr. Kiyosaki consider the silver you own an asset or a liability? Before answering remember that like a home, silver gives us no cashflow and and like a home it causes us to incur costs like storage, security and sometimes insurance. Looking forward to your response.

[maplesilverbug]

It would be interesting to know how the Forbes top 10 Richies (you know, people far, far more wealthy than "Rich Dad") view their house: asset or liability.

This same discussion was brought up on another site I read (Million Dollar Journey) (http://www.milliondollarjourney.com/ask-the-readers-is-your-home-an-investment.htm), I still state that people look at the "house = asset/liability" in totally the wrong way.

What you are ACTUALLY "investing" in is the MORTGAGE (ie. loan).

Now you can ask a bunch more questions.

[SeekrBrnEvryMin]

The problem is banks don't want to give loans right now, to anyone, superb credit or not. Banks are telling auto dealerships to not even send them any apps, thats how bad it is. They won't even loan money short term (5-7 years) at nearly double the interest rate. Sure right now is a great time to scoop up any deals you can get, but only if you can obtain financing or come up with the funds to pay cash. Thats pretty much a rock and a hard place.

Right now, my son just got approved to buy a three-acre parcel as well as funding to build a house on it.

My daughter and her husband just qualified and are shopping for a house.

All are first-time buyers.

A house is an asset, a car is an asset. Assets = liabilities plus capital.

[Gen Ripper]

Land is an asset assuming you are not taxed to death. Aside from portability, it shares many of the same financial attributes as gold.

I agree with maple.

I have been in a situation where I own two residences and was renting. I needed to stay mobile, but had no reason to liquidate my real estate.

I think maybe the problem is that people see their home as an investment when it goes up and some sort of injustice or travesty when it goes down in value...

[silverbuyer]

Income Property:

Income
Depreciation
Equity build up
Appreciation
Leverage

Don't let the last two years real estate bubble skew the long term historical performance of this asset.

If you've got something better, share it!

[Relayer]

Lets start with deciding what is an asset?

In business and accounting, assets are everything of value that is owned by a person or company. Any property or object of value that one possesses, usually considered as applicable to the payment of one's debts is considered an asset.

According to the first sentence assets are owned. 100% clear or not?
The second sentence says an asset has value which can be used to pay off debt.

If you have a car and no loan it is an asset with some value. If you can sell the car for cash, you can use it to pa off debt.

If you have equity in a car which was bought with your good credit, can sell it, pay off the loan, and have equity left over, it is an asset. It is not an asset if you sell the car and still owe money to pay off the loan.

[hiyosilver]

An asset is something that I own, (not the bank owns), that I enjoy....when it becomes a pain in the a__, it's no longer an asset...

[maplesilverbug]

An asset is something that I own, (not the bank owns), that I enjoy....when it becomes a pain in the a__, it's no longer an asset...

If you "own" a house, you probably own a mortgage, ergo asset.

And since when did assets become measurable in 'emotional states'?
If you "enjoy" something it's an asset, if something is a "pain in the ass" it's a liability? How absurd is that.