Why Primary Home is NOT an investment? (fund, cash, retirement plan)
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I have about $200k cash right now, and was thinking about buying a home cash.
If you listen to kiyosaki as well as others, they say your primary home is not an asset, it's a liability because your own home takes money out of your pocket and not into your pocket.
Well, I think keeping a dollar in my pocket is just as important as putting a dollar in my pocket.
So, if I could save money by not making a mortgage payment, why isn't buying my house cash a good investment?
PS. If i did buy my home cash, the extra funds I would get, I would invest in some sort of index fund. I would love to hear both sides.
I think when Mr. Kiyosaki talks about assets and liability he means "a single family home that you occupy is a liability because you pay the mortgage, heat, electric, maintenance, etc." However, "a multi-unit is an asset because the tenants pay the bills". In addition, if you do the numbers right you will have money in your pocket after the mortgage and bills are paid.
A single family home that is "paid in full" would still have the other monthly bills to pay, thereby Mr. Kiyosaki's definition it would still be "a liability".
A primary residence usually isn't that great of an investment. A primary residence involves paying a monthly mortgage (with interest), annual property taxes (where I'm at, property taxes on a $400k house will run you about $10k/year), maintenance, utilities, etc. In addition to these things, your "investment" is illiquid; you don't really reap the benefits until the property is sold (which could be 10-20 years or more from the date of purchase). Even if you build up equity, the best you can hope for is a cash out refinance (which is really no different than loaning money to yourself). In essence, you're hoping that the appreciation will be greater than the funds you've put into the property.
However, owning a rental property can be a very good investment. Reason? Because someone else is funding your investment and you also make a profit as a result of renting to them.
That said, buy a house that meets your needs, but keep the excess to a minimum because you won't realize the benefit for many years; a benefit that probably won't be that great. If you have additional funds you'd like to invest, you'd be better off buying a rental property or investing in the stock market.
Last edited by bicoastal10; 01-13-2010 at 01:34 PM..
your home is an asset if its paid for, but it is not an investment. Investments bring in more cash than their expenses. Since you acquire tax liabilities, repair liabilities etc, with no income to pay for them, they indeed would not be an investment...
Doesnt make it a bad asset to own free and clear, but the word "investment" would not be appropriate..
Well, I think keeping a dollar in my pocket is just as important as putting a dollar in my pocket.
So, if I could save money by not making a mortgage payment, why isn't buying my house cash a good investment?
I subscribe to the old adage of "a penny saved is a penny earned" too.
You'll hear a lot of arguments that a home isn't an investment, but nearly all of these arguments are based on carrying a mortgage with examples of how it will cost you more to own a home than to rent. Buying with cash is an entirely different situation.
Using the savings=income philosophy, my home gives me a ~5% annual tax free return from rent savings with very little risk. Granted, I may lose (or gain) some principal due to market fluctuations, but that's to be expected with nearly anything you buy.
If you listen to kiyosaki as well as others, they say your primary home is not an asset, it's a liability because your own home takes money out of your pocket and not into your pocket.
Here is where you went wrong with your posting.
The title of the thread is titled "investment" where your example asks if its an asset...
The home is NOT an investment because it gives you expenses. Under Kiyosakis' definition though, it is an asset. Where you got confused is kiyosakis' definition to change an asset into a liability relates to a home where its listed on "someone elses assets" list.
If a $200k home has a $100K mortgage, then you can indeed claim $100K is an asset ($200K home - $100K mortgage = $100K asset). The $100K mortgage is a liability, because your $100K liability is claimed in the banks asset collumn.
If you have a $200K home with $0 mortgage, then there is no bank to claim your mortgage as an asset, thereby you are able to claim its your asset.
Even though you can claim the $200K home as your asset, this though does not make it an investment because the home comes with expenses..
Well is he saying that leasing or buying with a profit for the landlord is a asset and takes no money form your pocket. I really never understood the agrument.He must live in a tent:I assume or pblic housing.I also notice that the rishest and most successful investors all seem to own their own homes and in many cases several.
I have about $200k cash right now, and was thinking about buying a home cash.
If you listen to kiyosaki as well as others, they say your primary home is not an asset, it's a liability because your own home takes money out of your pocket and not into your pocket.
Well, I think keeping a dollar in my pocket is just as important as putting a dollar in my pocket.
So, if I could save money by not making a mortgage payment, why isn't buying my house cash a good investment?
PS. If i did buy my home cash, the extra funds I would get, I would invest in some sort of index fund. I would love to hear both sides.
Thanks.
Don;t listen to Kiyosaki. A primary home it is an investment, but it should not be counted as part net wealth as far as your financial planning.
Why an investment? It is a huge financial undertaking. For most it is the single largest financial contract one signs. It requires a major downpayment and debt contract. As with any financial investment it offers the prospect of capital gains, the need to consider resale value should you need to sell, and possible cash flow should you need to rent a room. But it is more than simply a financial investment, it is an intangible investment into locale, neighborhood, community, schoolsl, and relationships for you and your family.
Why should it not be counted as financial wealth? Because it cannot be liquidated in the same way as other financial assets (including rental homes). Selling one;'s primary home involves the selling of the intangible investments listed above. That is not easy. Many are unwilling to do this. And for many, such as the elderly, they should not do this for risk of undermining health and needed social networks. For those who sell, they in effect get only a fraction of the value of the home, losing social status, etc.
I would organize my Excel files with non-primary home financial wealth and with primary home financial wealth. Track the financial value of the investment into your primary home, but for financial planning purposes only work off the non-primary home worksheet.
Example. I have a friend who had a charming home. He decided to sink nearly all of their financial wealth into an upgrade of the home. Technically, it was unnecessary, but the result was that their home was transformed into a dream home. But getting this dream home also required a huge mortgage and huge payments. Right now, their net worth is almost all (perhaps 90%+) is tied up into their primary residence. Payments have not been easy to make. Yet the only way to ease their burden would be to downgrade back into something like their old charming home or simply to move to another city taking with them substantial capital gains.
But such a move is not one they are at this point willing to consider. It would disrupt the life they set out to build. So yes, that option exists. And Yes, thank goodness they treated their primary home with some eye to investment. But by concentrating all their net worth into their primary home, their financial planning is related less to investment planning and more to their primary residence.
So you have to approach the purchase of a primary home as an investment. However, for your own peace of mind and social continuity, you need to build financial net worth apart from your primary residence. When you are young, the two meld as one. But if older, married, and with kids, the two should be kept separate.
S.
P.S. If you pay cash, you give up some tax benefits that in effect knock down the cost of the mortgage from 5% to less than 4%. As an alternative to a 100% cash payment (and not asking why you wish to do this), consider a larger downpayment (say 30%-40%). Then you have say $120-$140K to investment in a well diversified financial portfolio that should yield on average 4%-8% annual return.
P.P.S. Kiyosaki's statement actually supports my discussion above. Don't purchase a home lightly or the house will simply eat away at net worth. Instead, is should be only one part of a well balanced portfolio.
P.P.P.S. Please realise that Kiyosaki is not a financial expert, but a marketing genius.
The problem with buying your home for cash is that right now, the cost of hiring money to buy one is historically pretty low. At my local Banco de America branch yesterday, they wanted 5%. Now, acknowledged:
1) Even 5% interest is still interest out of your pocket.
2) There is a peace-of-mind factor that comes from owning your own home free and clear.
The real question is whether you think you can make better than 5% on the money over the loan's horizon. If you do not feel confident you can do that, you could look at paying cash as paying you an automatic 5% return. But if you feel certain you can get 10%, and you instead buy the house outright with it, then you are leaving money on the table.
All the debate/discussion about whether a home is an investment is, to me, fairly silly because it attempts to simplify into a one-word definition something that goes much farther. Most of us need a place to live. Most of us don't absolutely need a CD or 100 shares of PFE. To see the matter clearer, realize that while you cannot be assured your home will appreciate, or that it will pay you a rate of return better than what you could get elsewhere, it is still something you buy, own and probably someday sell. It is certainly a fixed asset of your wealth, and if you choose it wisely and maintain it well, you will do your all to avoid deterioration of that asset. It doesn't make a good retirement plan, but it does make a good asset that could make retirement life much easier (no house payment). I think you first have to look at it as a place to live into which you place wealth, and see your maintenance and improvements as ways you safeguard that portion of your wealth. Is it an 'investment?' Who really cares? So long as you make other plans for retirement income, how you define a home is up to you.
Even though you can claim the $200K home as your asset, this though does not make it an investment because the home comes with expenses..
Other investments come with expenses, so this claim isn't entirely true.
If a business has to pay an inventory tax at the end of the year, that's an expense. If a business uses leverage to buy their inventory, they've got a monthly payment which is an expense. Businesses also need to house their inventory which incurs expenses. When a business pays for insurance on inventory, there's another expense. The simple fact is that when businesses make an investment in inventory, they have many of the same expenses that a homeowner does.
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