Mikael Rieck is the author of more than hundred articles on topics of how to make money both online and offline. He has been online since 1999 and has always had a passion for money making opportunities and teaching others how to make a profit.Your House, Your Car and Your Boat Are Not Assets
I will not take credit for this idea as I have learned it from Robert Kiyosaki (the author of the Rich Dad books) but the fact remains that it is very important that we realize that our homes, cars and all the other material stuff that we have bought are not assets. It is actually far worse because most of them are liabilities and we don’t even realize it.
Many of us have been told by our parents, bankers and the media that we should buy a house because it is an investment and a great asset. From an accountant’s point of view that might be true but the fact is that a house is nothing but a liability that is sucking on our paycheck every single month.
Does this mean that you shouldn’t buy a house? No of cause not because a house has value in a lot of other ways such as: providing roof over your head, being a place to rest and relax and a place to take care of your family. All I am saying is that we must not be led to believe that we’re investing in an asset.
Can the price of the house go up and make us more money if we sell it? Absolutely! But given what has happened in the last 18 months I am sure that we can all agree that prices can go down as well and that none of us has ANY control when it comes to the price and therefore the “investment”. (Control is a vital part of investing but that is a topic for another post).
The odds of making money on a home is probably better than winning the big prize in the lottery but never the less it is still gambling to invest hoping that prices will soar.
Can Real Estate Be An Asset?
There are plenty of opportunities to invest in properties and become a real estate investor but the difference between them and the person that purchases a home is that the investor is buying with his head (to turn it into a profit) whereas the home owner will be buying with the heart.
The investor will see a property that he/she can buy using other people’s money (the bank’s money), renting out the place to someone else and have them pay back the mortgage to the bank (the monthly rent they will be paying).
What they will look for is an opportunity to generate a positive cash flow every month that will increase their wealth and pay back the mortgage to the bank. In contrast the home owner will also be paying back the mortgage but using his or her own money. On top of that the home will not be bringing in any additional cash flow but will instead drain the finances due to repairs, utility bills, new furniture etc. All of which the investor will have someone else pay for.
Don’t Buy a Bigger House
When people get a pay raise (or a new job with a higher salary) they will often consider moving to a bigger house and sometimes this is even the advice that their bankers will give them. But the fact remains that buying a more expensive home will just drain even more of your resources (which will go to the bank, so no wonder that is what they will tell you to do).
Instead the best (from a financial point of view) thing you can do is use that extra cash to look for investment opportunities. Find a small apartment at a low price and start renting it out. Create that monthly PASSIVE cash flow and keep repeating the process. As some point you will be able to buy that bigger home but now the difference is that the monthly cash flow you get from the apartments will be paying the bills which basically means that other people are paying for the home you live in.
Nice thought right? 
What are your thoughts on owning a home? Do you see it as an investment or do you see why it is no more than an expensive lottery ticket?
To Your Success,
Mikael
13 Responses so far
Geoff@babysitting jobs
August 21st, 2009
1:46 am
Great post Mikael. I’ve read many of Kiyosaki’s books too and I think it was from there I read that you make money from a house when you buy not when you sell. In other words, if you buy real-estate for a price where you can start making passive income from the beginning, then it doesn’t really matter what the price of the house does after that since you will still be making passive income from it every month and after 25 years it will be paid for.
As far as buying and hoping prices will appreciate so you can sell later, I agree this is wishful thinking. I read a book a few years ago called “Irrational Exuberance” by Robert Shiller. Very interesting read if you have the time. It has a chapter that talks about how the real-estate market is in a major bubble when you look at prices over the last 100 years. Now the market has fallen a fair amount since then, but it could still fall further. Also, historically real-estate on average appreciates only about 3-4% per year and if you take into account inflation even less than that.
Manshu
August 21st, 2009
3:53 am
I learned about this idea a few years ago, and it really appeals to me. If you look at the current crisis and the bust in the housing market, the merit of the idea drives home even more.
.-= Manshu´s last blog ..What is an IPO? =-.
Ric
August 21st, 2009
8:37 am
If you buying a home to live in buy it when you have the money and you can afford the payments, if it’s an investment that’s another story. All that’s happened in the last few years were people hoping to make a quick buck, but boarded the train late. I even heard the lenders and FHA were using welfare and food stamps to qualify people for homes, we have seen the dark side of capitalism.
The jury on RE is still out, I believe it depends on which way the govt. will play this. You hear talk of the interest deduction being trimmed, in my eyes this would pretty much kill the market for a while. I like the prospects of VRE.
Regards
.-= Ric´s last blog ..How To Decide Which Internet Business Is Right For You =-.
Mikael
August 21st, 2009
8:51 am
@Geoff, thank you for the book recommendation. I’ll definitely look into that one. I always take time to learn more about the stuff that I find to be important.
@Ric, I would say that “being able to afford the payments” should not be the requirement… meaning that if you use all your money on the payments you’ll have nothing left to invest. I know it is a matter of philosophy but I would recommend to never buy a house (to live in) that would cost you more than 30%-40% of your income (after tax).
Rather buy cheaper and be able to invest than to get yourself into the rat race trap because you have bought too expensive a house.
As for the VRE (Virtual Real Estate for those that doesn’t know aka. Websites) that is definitely one of my recommendations as well. Only downside compared to RE is that you’ll have a hard time financing it with OPM (Other People’s Money).
Ric
August 21st, 2009
8:55 am
Mikael, I should have clarified, we agree affordable payments, as you stated.
Ric
.-= Ric´s last blog ..How To Decide Which Internet Business Is Right For You =-.
Matt
August 23rd, 2009
10:38 am
My wife and I bought our house at the peak of the housing boom (literally the day before it started its downward spiral). We were happy with it but because of the price of it we needed to get a large mortgage.
The plan was always to do it up as it was in dire need of repair and then sell it – we were lured in by the masses making money out of property development.
However, the market then crashed, we had a baby and my wife’s income ceased. Selling it is not an issue now as we couldn’t afford the costs that go hand in hand, plus due to the recession we aren’t able to remortgage etc. So in a turn of events the house we bought has suddenly become a long term investment – we’re going to slowly improve the house, add square footage, make it something valuable in the future.
So in that regard it was a complete lottery – we were hoping for one thing and ended up with something totally different.
Mikael
August 23rd, 2009
6:24 pm
Hey Matt, unfortunately you’re not alone as so many people did exactly what you did and for one reason or another find themselves in a similar or worse situations.
The best thing to do is to realize where things went wrong (I’m talking in our heads and not one some exterior “thing” that will never be the true problem) and learn from it. I believe that once we truly see where we made bad judgments, we’re able to grow that much more where we come out “on the other side”.
At least you still have your house
Thomas Pedersen
August 24th, 2009
10:00 am
Hey Mikael,
Great Post, I was actually just reading another post on the Amino blog yesterday about this same issue, so I was looking for an mp3 of the book I could purchase and download but instead found this link where I’m now listening to it at this moment.
http://www.imeem.com/blazeurmind/music/DfTaFx36/robert-kiyosaki-rich-dad-poor-dad/
Robert really has done some great things, but it has been a while since I red any of it.
We also bought a house last year, which has also fallen in value a lot, though we didn’t buy it at the peak. And it will definitely be along time before we move from there, so the marked has probably turned a bit by then.
.-= Thomas Pedersen´s last blog ..Get $140 discount with your hosting account at Hostgator =-.
Karen @ Used Cars in My Area
August 31st, 2009
7:56 pm
I am retired now, but as a young person, my first investment, at the time of my first job, was the purchase of an old house that had been divided into five apartments. I lived in one unit and collected rent from the other four. Income from the rents covered the mortgage and thankfully repairs were not too demanding. My finances would not be what they are today without this jumpstart.
Regarding the ownership of a single family home, sometimes an owner can make money on the sale, but don’t count on it.
.-= Karen @ Used Cars in My Area´s last blog ..Buy a Preowned Car =-.
Allan @ Cardboard Moving Boxes
September 3rd, 2009
12:21 pm
I have an investment property myself but due to the drop in house prices, i find myself not being able to cover the mortgage with the rental income i can recover. I do have a 90% mortgage though which i guess doesn’t help so if i could offer one piece of advice it would be to put down at least a 25% deposit on the property so your martgage will be the remaining 75% which should be easy enough to cover with your rental income.
All in all, i think property investment is a great idea and safe place for your money as long as you are looking at long term and that you but sensibly.
.-= Allan @ Cardboard Moving Boxes´s last blog ..Contact Us =-.
Mikael
September 3rd, 2009
12:31 pm
Hi Allan,
Thank you for your comment. I am curious as to why the price of your property and the rental income go hand in hand?
Where I live rents are predetermined and even if the property value went to zero the rental income wouldn’t change.
/Mikael
Lissie@Passive Income
September 6th, 2009
5:08 am
Yes I agree Mikael Allan’s statement makes no sense. We have a number of real estate properties which have probably either gone done in value or are flat – I don’t know – what I know is the mortgage rates have gone done and the rents have gone up – so my cash flow has improved!
The banks have a lot to answer for – I cringe on every mortgage application there is a list of “assets” including cars and furniture LOL. When we were actively buiding the portfolio we had absolutely stupid sums offered to us- if we had borrowed to the hilt like the banks wanted us to we would be in deep, deep trouble now! We took 7 months off, I’ve spend years building a business, not earning my previous good income, we had these options because we never borrowed to the point that we were subsidising the rentals
.-= Lissie@Passive Income´s last blog ..Do You Have a Plan B to Support Your Passive Income Business? =-.
Mikael
September 6th, 2009
3:56 pm
Hey Lissie, I’m glad I’m not the only one that didn’t get that.
As for banks and they way they have acted I fully agree with you. Even though I am a strong believer that people must take care of themselves and not let others do the thinking for them I still think that banks went overboard on this one.
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