I don’t take for granted the years I spent learning from Robert Kiyosaki. He and the fabulous Sharon Lechter penned the book, Rich Dad, Poor Dad, one of the best-selling business books of all time. I feel extremely honored to have been able to learn from a man, whom I believe, was the best at teaching the importance of the proper mindset when it comes to money. His ideas were ingrained in my brain and taught me some extremely valuable lessons. He surrounded himself, he said, with people who were smarter than him and he was always willing to learn. Because of my association with those “smarter people,” I was prepared for the bubble when it burst in 2006/2007. We had sold nearly all of our rental properties, in preparation for that correction, at nearly the top of the market.

 

Robert taught me a lot of things and had several sayings, some I cannot repeat.  However, one of the big ones and maybe his favorite was “your home is not an asset.” Think about that for a moment.

Your Home Is Not an Asset

I am absolutely shocked by the number of people who continually fight this fact with BS debate. Fact is fact and many people learned this the hard way when they lost their homes following the crash. More than 8 million homes were lost to foreclosure in the years that followed. So, I’m going to give that lesson to you again and I pray you take heed of its warning because those same “smart people” and I believe that another bust may be just around the corner. I do not want anyone to be a victim of the economy again. This time, you know what’s coming. This time, you have a heads up.

The truth is plain and simple. Assets put money into your pocket. Liabilities take money out of your pocket. Your home is probably one of the biggest liabilities you have and here’s why.

Fact One: An asset puts money in your pocket.

When you buy a house as an investment, or really any property, you make the money on the buy. That means you should always purchase a house or property below the fair market value (FMV). It can also mean that you bought it at or slightly above FMV, but with no money down. That may still be a good buy. Maybe it means that you are putting very little down and the property is cash-flowing amazingly well for you from the start. Whatever the situation is, you made your money on the buy, meaning at the time you purchased it. If you had to sell it today, you could list it slightly below retail and dump it quickly without losing any money. (Note - Your personal residence may qualify in this way if you got it for a good deal, but read on)

An asset, like this investment property, should be putting money in your pocket throughout your ownership. It should be creating a nice monthly cash flow for you from the start or very soon after if it needs a few repairs. If not, the income it creates should be paying down the mortgage in a short period of time, way less than 15 years.  This is something that your personal residence most likely does not do. Not unless you are renting out rooms to your kids that cover all the home’s expenses and then some, then kudos to you.  I have five children and I haven't made money off of them yet.

Fact Two: A liability takes money out of your pocket.

This is more than likely your home’s situation: it’s a liability because it takes money out of your pocket. If you aren’t renting out the rooms to your kids, then you are probably laying down the cash for the mortgage payments yourself each and every month. If you are, then that’s the definition of a liability and not an asset. Now, it doesn’t matter what you bought it for, it has become a liability if you have money coming out of your pocket to maintain it.

Holding land is sometimes like this.  Someone may buy a large parcel of land for cash, have no mortgage on it, yet they have to make a tax payment every single year and may even have other expenses, too.  Now, this land is costing them money.  Is it an asset or a liability?  Well, because they paid cash and can probably sell it at a significant discount rather quickly, they could, most likely, still make more than they spent on it, so most would say it's still an asset.  Many investors would argue with that, though.  That chunk of land doesn't make money until it's sold, unless you lease it out as farmland, or figure out another way to make it cash flow.  That is why most investors don’t like to hold land.  There aren’t many write-offs and it may take years, sometimes decades, for that land to appreciate.  Until it does and you sell it, it just costs you money.

Secure Investing Rule One: You should never touch the equity in your home unless you like to gamble.

Back before the bust, very few had lived long enough to remember the values of homes ever going down. It seemed to most that the prices of houses only went up, so they were willing to borrow against the projected equity in their homes. This was a really bad idea and still is.

Not only were the bankers playing games with ARMs and who obtained loans, but they created new programs like interest-only loans.   New home buyers were buying houses they really couldn’t afford, or that they couldn't qualify for, and some were taking advantage of interest-only loans.  At the same time, many homeowners were taking out loans against the equity in the homes they owned. When the bubble burst and the home’s value took a dive, the first group couldn’t refinance and their payments became unmanageable. They were in over their heads. The second group now owed more on their home than it was worth. If they couldn’t swing the original mortgage plus the home equity line of credit loan payment, they, too, were upside down and in danger of losing their home. As we know, millions and millions of families did and it wasn’t pretty.

Had they read and listened to the advice of Robert Kiyosaki, they would have never placed themselves or their families in that type of danger. However, that was the beginning of the spend-happy consumer mentality of Americans. Believe it or not, ten years later, it’s only gotten worse.

If your home isn’t an asset, what is it? Let me use this example to help you decide.

When my mother-in-law moved out of her home in Chicago to the suburbs after her boys had left home and they retired, there was a tremendous amount of stuff to move. I’m using the word stuff, but I think you know what word I would really use. My in-laws had saved everything “just in case” it had any value in the future. An example would be a paper placemat from a Denny’s where they had lunch when they attended the nineteen-who-the-heck-cares Rose Bowl in Pasadena when my husband was a young boy. I'm not kidding, this is a real example, and there was more.

 

Boxes and boxes of these types of items were just taking up space in their home for years.  Why?  Because they were hoping that they would mean something to someone someday and somewhere. Not only would they have to mean something to someone, but, by divine providence, the two parties would have to meet somewhere, someplace in time, and exchange that something of potential value with some type of currency.  That’s hoping a lot.  Right?  You’re literally hoping that maybe some guy who played for one of those teams back in college is sitting on his chair in his undies watching a replay of his Rose Bowl performance and decides, on a whim, to go search the internet for "Denny’s Rose Bowl Paper Placemat." Really? And he’s going to be willing to pay you what, maybe five bucks for it? It's a paper placemat.  Come on! Now if it was a placemat from the Peppermill in Vegas signed by Elvis when you bumped into him having breakfast there, fine. Frame it, save it, and sell it. Otherwise, you’re just hoping.

Now your home isn't like that placemat.  Your home is more like a Star Wars figure. If you keep it in the original packaging and don’t play with it, it will probably go up in value, but don’t count on it.  A Star Wars figure should never have the responsibility of being your retirement fund and neither should your home.  Hope should never be an investment strategy, not unless your faith is already moving mountains.

Can your home ever be an asset?  Sure. There are ways to use your home’s equity to create an income, but, again, they are a bit of a gamble.  (I'm going to give you those examples in an upcoming article, just in case there's a bit of a gambler in you)  For now, I wouldn’t recommend doing anything like that until you had a comfortable amount in your savings account, eliminated all your bad debt, and really knew what you were doing investment-wise.  Until that time, treat your home as if the value could drop any minute. Don’t borrow against it because... your home is not an asset.  Understood?  Star Wars figure, maybe, but not an asset.

 

 

 

 

 

Michelle R Russell

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