Your House is a Liability

As I read the various books by Robert Kiyosaki, I saw that this statement come up multiple times. I kept trying to wrap my head around this concept, and while I can understand that a car is a liability, it has been deeply ingrained in our minds that our house is an asset (maybe not in this election, but definitely so in previous ones). Apparently, Robert got a flak for this one statement when the books were first published. After all, how could our house, which we have invested in so much monthly, and have renovated so that it becomes a conducive place to live in, be considered a liability? Moreover, past trends have showed us that property prices in Singapore generally tend to go up, and we can be assured that it is a tangible asset that will not disappear overnight. I just recently engaged in a debate with my dad on this and because he grew up in a period where property prices could easily double or triple, and he benefited from the economic growth of the nation as well, he was thus strongly adamant that a house is an asset.

So let me attempt to shed some light on this, as best as I understand. First, we must understand what it means for something be an asset and a liability. It is not about whether the valuation of a house has increased or decreased. The valuation is merely the market’s opinion of the price of the house, not its value. It is not even about whether the house has been paid in full or is being paid via CPF or cash. Because even if the house has been fully paid for, there are other associated recurring costs, like maintenance and utility bills. Simply put, it is just about whether money enters or leaves one’s pocket.

Viewed from this perspective, we then understand an asset to be defined in terms of the net cashflow in/out of your portfolio and not the actual product (house, car, stocks, etc.). The examples he used was most illustrative: if monthly mortgage + all associated costs of a typical place is about $2000 and it’s not bringing in any income, then it’s a liability because of the negative cashflow. Even if you find a tenant and can rent it out for $1,800, it is still a liability (although less so) with negative cashflow of $200. It only becomes an asset when your rental income is more than $1,800 as your cashflow then becomes positive. The same concept can be applied to your second property or any other asset that you own.

Banks say that your house is an asset. They are not lying – it is the bank’s asset.

The diagram above also shows the cashflow of a homeowner which I took it from Rich Dad’s Guide to Investing. It can easily be adapted to the Singaporean couple version where we use our monthly CPF contributions from our income to pay off our mortgage. There is of course the double whammy because of the 2.5% interest that can be accummulated in our CPF OA. No matter what others say about how CPF money is being tied up, it is still money for our retirement, and could be thought of as an asset because it adds positive cashflow to our retirement portfolio. I hope this post reframes your thinking about where your house should sit in your portfolio.

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