Abandon All Fear

What nobody else seems to be saying…

Posts Tagged ‘robert kiyosaki’

[Housing Market Lies] Your Home Is An Investment

Posted by Lex Fear on July 14, 2007

Previous Housing Market Myth articles: House Prices Always Rise, Low Interest Rates Means I Pay Less

This one is simple so it’s going to be a relatively shorter than my previous articles. Up till now, you could simply assume I’m a bitter late 20’s Gen-XYer who is sounding off due to not being able to get on the housing ladder. But don’t just take it from me, take it from property millionaire Robert Kiyosaki, to show you why the home you live in is not an investment.

Let’s start by getting a definition of investment:

“An asset or item that is purchased with the hope that it will generate income or appreciate in the future. In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or appreciate and be sold at a higher price.” – Answers.com

Wouldn’t a home fall under that description?

We need to be clear what we are referring to. A house, can be an investment, since you can purchase a house as an asset and sell it later at a profit (or loss depending on the market). A home however, is not the same as a house. A home is something you live in. You can change homes, but you can’t really sell your home unless you intend to be homeless.

Of course, you may argue, people make profit on their homes when they appreciate.

This ‘profit’ is only made when the home comes to be sold, and unless you choose to move into a home that is smaller (ie. of less value) the ‘profit’ is not going to be realised as it is invested into the new house of equal or higher value. This is further backed up by the dictionary definition of profit:

  1. An advantageous gain or return; benefit.
  2. The return received on a business undertaking after all operating expenses have been met.
    1. The return received on an investment after all charges have been paid. Often used in the plural.
    2. The rate of increase in the net worth of a business enterprise in a given accounting period.
    3. Income received from investments or property.
    4. The amount received for a commodity or service in excess of the original cost.

Answers.com

Therefore profit is what you have left over when you have met all expenses. Profit is not increase, it is less costs. Profit is what you get to take home to spend on whatever you like.

Robert Kiyosaki, the author of Rich Dad, Poor Dad, further defines your home as a liability:

In “standard” accounting, if you buy a house, you consider it an asset. However, from a cash-flow perspective, if you have to make mortgage and property tax payments, while the house produces no income (i.e., it causes a negative cash flow), the house is a liability. Anything that produces income is an asset; anything that incurs expenses is a liability. – Basic Money Skills

Don’t jump on the housing wagon thinking you can sell if it gets tough. When interest rates rise it will be difficult to sell your house for a ‘profit’ because many others will be trying to do the same thing. The best advice for FTB is to hold out for lower prices. If you’re offer is not 30% lower than the asking price, then it’s not low enough. Meanwhile renting gives you the opportunity to walk away from bad deals. It also frees you up to leave your current property if the rent is too much.

Posted in Buyer Beware, Financial Terrorism, Housing Market Myths, Profiteering, Property Market, Wealth Creation | Tagged: , , , , , , , , | 4 Comments »