I recently saw an interview with Robert Kiyosaki. He is an investor and most well-known for his Rich Dad Poor Dad books. While the books are not highly specific in most areas, they are great motivational books and they give a general overview of his philosophy when it comes to investing.
One of the things Kiyosaki said in the interview is that a house is not an asset. It is a liability. This is coming from a man who has made a big portion of his wealth from investing in real estate. But Kiyosaki is not really referring to investment real estate. He is talking about someone buying their primary residence to live in.
I recently wrote a blog post on housing costs and I referred to a house as a consumer good. This is really the same thing that Kiyosaki is saying in that a house is a liability. From a financial perspective, he is correct. Houses cost a lot of money and I’m not just referring to the mortgage. There are a lot of costs that go into owning a house. While I see nothing wrong with spending money on a house that you like (as a consumer good), I also don’t understand why so many people become house rich and cash poor.
This goes against conventional thinking that owning a house is an asset. But that is why so many people are not rich. In fact, most people barely have any savings at all. They may own a nice looking house, but they are a few missed paychecks away from a near financial crisis.
I remember watching a special program one time with a panel of “experts”. One of them was Robert Kiyosaki. He had a different view of things from the rest of the panel. Someone asked a question about real estate investing. One person on the panel suggested that it was a good idea if you can get rent to cover 70 or 80 percent of your costs (I don’t remember the exact percentage that was given, but it was below 100 percent).
Kiyosaki scoffed at this idea. He said that cash flow should be 130 percent or more (or some percentage close to that if my memory serves me correctly). He believes it is foolish to buy an investment property that produces negative cash flow, even if there is a good chance of appreciation. He believes in positive cash flow.
You don’t get rich when you are paying out more each month than you are taking in. I suppose over a long period of time you could pay off the mortgage and eventually get positive cash flow. But then how many years will it take just to break even with the previous negative cash flow?
I am a proponent of investment residential real estate if you are in a decent position to do so. But one thing I make clear is that it should always be positive cash flow. (Note – there could be exceptions if you already own the place and you are moving and you can’t get positive cash flow right away. But if you are buying a place for investment purposes, then you should be able to produce positive cash flow quickly or else it is a bad idea.)
In conclusion, if you are buying a house to live in, it should be viewed as a consumer good. You should not justify paying a lot because it is an “investment”. It is not an investment. It is a cost of living. If you want to pay more for some luxury, then at least be honest with yourself that you are spending more for this and that it is not for investing.
If you are buying a house (or condo) for investment purposes, your primary focus should not be on appreciation. Your primary focus should be on producing positive cash flow. You will not get rich, or anywhere close to rich, if your property expenses are higher than the rent being collected.