Your House Is Not an Asset
It was a shocking revelation when someone said that Your House is NOT an Asset. Then I happened to read this book Rich Dad Poor Dad by Robert T. Kiyosaki, who also said the same thing. My mind was numb with this statement.
What is an Asset?
For quite a long time, I believed that everything I owned was an asset. My car, my motorcycle, my stereo, my PlayStation, my computer, and of course, MY HOUSE!
Why do I believe that? Its because I have been taught that way my whole life. My father and my mother said the same thing. My high school economic teacher said the same thing. My college teachers (well, they don’t have a professor degree) also said the same thing. It made me believed that everything I owned was an asset.
It is partly true that everything I own is an asset at least, from an accounting point of view. Bookkeeping, for example, will always put everything that I own in the assets column. If I owe something, they will be put in the liabilities columns.
So here is the kicker. You’d think that when you pay off your mortgage, you don’t owe anything to anyone for the house. You own the house. But that’s not necessarily the whole truth.
You still owe things for this house.
What does Full Paid Mortgage House Ask For?
- Water and Electricity Bill
- TV cable
- Lawn Care and Landscaping
- Property Tax
- Neighborhood Security
There are a ton of things that your house will ask from you and they will all cost you money. I have heard that a neighbor filed a complaint because his neighbor did not keep their lawn beautiful. Sounds crazy, right? But you can waste your time and money for a complaint like this.
So my simple understanding about an asset is: Assets will give you money while Liabilities will take your money away.
In the above case, your house takes your money away. Your house is not an asset!
My House Value Will Rise Over The Years
You don’t know property investment, Arief! My house will increase in value and I can sell it to make a profit!
You are right and you are wrong.
You are right because…. Your house value will rise over the years. But compared to what? If you are comparing it to the price when you purchased it then you are right again.
But there are other factors that will make you wrong.
You are wrong because…. The main factor for this is inflation. Your money will lose its value with the increase of inflation. Do you remember how much a chocolate bar was 10 years ago? An ice cream cone, perhaps? How much do they cost now?
In Indonesia, while I was in elementary school (this is 30 years ago), I bought a bowl of meatballs for Rp100,-. Today, it costs Rp30,000,- a bowl. That is a 30,000% inflation! It is a 1,000% inflation per year.
Isn’t Inflation Good for The House Price?
Yes and No. (Why do you keep answering like this?)
Yes. Because a house is a good instrument to hedge against inflation. The house price will increase accordingly to the rate of inflation. Even the house might do better than the inflation rate.
No. Because a house is just a good instrument to hedge against inflation. (Hey! Isn’t that the same answer?). It is not only your house that will increase in value but the whole property industry. It means when you sell your house, you might not be able to buy another house and make a profit. Unless you buy a smaller and cheaper house.
That’s why I said that a house is a good hedging instrument against inflation. Your money on the house retains its value over the years.
I Can Flip The House for a Bigger House.
Oh yes, you can. If you have appraised your current house and the price has doubled, even tripled, from when you first signed that mortgage. And now you are thinking about getting a bigger house, this is totally possible.
The new appraised value will make a down payment really easy. You just need to pay the new mortgage and you have a new house. A bigger house! Yay!!
Now you have a bigger liability! Congratulations!
You have a:
- Higher mortgage payment
- Higher insurance rate (because of your house value and your current age)
- Bigger lawn care expenses (It is a bigger lawn, right?)
- Higher electricity bill (A bigger lawn needs more lightings, right? How about heaters during winter?)
I’m not saying that you shouldn’t enhance your life. I am just saying you should consider what you think about an asset is.
Invest for Cashflow, not Appreciation
Do you remember when the house market bubble crashed during 2007-2009? The subprime mortgage crisis?
If you bought a house during its peaked price in 2006, you would have “lost” a lot of money. The housing price has not yet returned to its glorious days in 2006. If you need money immediately, you would have to sell the house under the market price and you’ll “lose” even more money.
That’s why you need to invest for cashflow. A positive cash flow will add money to your pocket.
Your house will always give a negative cash flow unless you don’t live in it and rent it out.
Invest in yourself first. Financial education is a must nowadays. You cannot think with an outdated financial knowledge. I really recommend you to read some of Robert T. Kiyosaki’s books.
If you still don’t believe that your house is not an asset, try not paying the property tax. The government will come as fast as a hungry wolf pack. They will confiscate your house in a blink of an eye. Your house is not an asset.
Please leave your comments and questions about your house or your asset down below!