“It’s only when the tide goes out that you can see who is swimming naked.” — Warren Buffett
Is your house an asset or a liability?
Robert Kiosaki from Rich Dad says that an asset is something that puts money in your pocket each month and a liability is something that takes money out of your pocket each month.
The house that you live in, according to him, is not an asset.
It’s actually a liability.
But everyone says the house you own is your greatest investment, right?
This is the difference between really wealthy people and the middle class.
The things the middle class thinks are assets are liabilities.
We have over $150 million in real estate assets that we are general partners on in the Southeast.
I choose to rent in the Los Angeles area.
I’m gonna show you why I do that.
I’ll show you why I can get higher returns and why it’s much safer to do this.
We’ll go over this in three easy steps.
Let’s get into it!
1. Your House is Not an Asset
I hate to burst your bubble, but your house is not an asset.
My house in Pasadena, California is 1,250 square feet with three bedrooms and three bathrooms.
It also has a small patio and a front yard.
The going rate for a house like this is around $1.2 million at the time of this post.
I am talking about California housing, mind you.
In Alabama they’d go for about $120,000.
Typically when you buy a house, you put around 10-20% down.
That would be somewhere between $120,000-$240,000.
My current rent for this place is $3,450/month.
That price probably shocks some of you!
According to Zillow, if I were to own this house, my monthly payment on this particular place would be $5,713.
Again, this is for a value of $1.2 million.
That’s what the mortgage would cost to cover this.
You can see there’s a delta of around $2,300 that I would need to pay to own my house rather than rent it.
In some areas, it can actually cost more to own than it costs to rent.
This has not always been the case.
This is not the case in every market.
But right now where I live, this is the case.
That’s what you need to look at: Where you live.
What are those differences between owning and renting?
How about we play this out for a second:
Let’s say I buy a house for $1.2 million.
I take the money I could have invested, whether it’s $120,000 or $240,000…
I invest that money into the property as my down payment.
Let’s say the value of this home goes down by $100,000.
The value goes from $1.2 million to $1.1 million, which is not a big move.
It’s about an 8% move.
In that case, I’d have a choice.
If I wanted to move to another area, or I wanted to buy a different house, I would have to pay $100,000 for the privilege of selling this house.
I would have actually lost $100,000.
What happens if you want to rent out the space?
Let’s go back to our equation of how this works if you do that.
The loan payment is $5,713, but the rent is only $3,450.
You also have your cost to maintain that place.
So you’d be paying at least $2,300, plus any management fees and maintenance.
All that just to have the privilege of owning this house without living there.
I think that is absolutely crazy!
Going back to the definition that Robert Kiosaki gives: Is this an asset or a liability?
With interest rates rising, mortgage rates are starting to come up.
You should be concerned about those rates when it comes to actually owning a house.
Do they impact whether your house is an asset or a liability?
Now let’s talk about opportunity cost!
2. Opportunity Cost
What is the opportunity cost of you renting versus owning your home?
Now, let’s say I decided to buy this house.
I put 10-20% down, which we said was between $120,000-$240,000.
We’ll find the middle of that, which is $180,000.
Instead of buying, I took that money and invested in something that could get me 15%/year.
Before you think that’s a pretty high investment return…
There are some ways to do that, which we’ll get into in the next step—so keep reading!
From that $180,000, I would be getting $27,000 per year.
That would bring my first year total from $180,000 to $207,000.
After five years, if I just continually had this 15% return, I would double that money.
I would go from $180,000 to $360,000.
I would get passively $54,000 per year from this income stream.
That would equal around $4,500/ month, which would cover the rent right now.
The rent is $3,450, then it would be $4,500.
Even with inflation, that would easily cover the rent.
When you consider this, you also need to consider the idea of renting versus owning.
Not only would I save the money on the down payment, but I would also save close to $2,300.
That amount might even be more because of other costs involved with ownership.
If I rented, I would save $2,300/month over five years.
If I got 15% per year, that $2,300 would turn into $208,567.38.
That is astounding, right?!
You could save $208,000 just by renting versus owning.
That would basically assume a 15% return.
If I took that in combination with the $180,000 I saved, that brings the total to $388,576.38.
In this scenario, you would’ve saved this money and had the ability to invest it.
But what about if you own a house?
Don’t houses appreciate?
Well, the house would have to appreciate $388,000 over the next five years.
That’s a 32% increase of where it is now!
Could that happen?
Could single family housing in this area appreciate?
It totally could.
Single family housing could go up substantially.
This house could be worth somewhere around $1.5-1.6 million.
But what happens when rates rise?
That’s a concerning thing, especially in this area.
There is also rent control in some areas.
With rent control, they can’t raise the rent more than 5% per year.
They’re even talking about potentially limiting that somewhere between 2-3%.
With all of these factors, it is much more limiting to own in this particular market than it is to rent.
Now let’s get into some alternatives where you can apply your resources.
3. Consider the Alternatives
So what are the alternatives?
If you decide to rent instead of buy, where will you put that money?
Where will you get these great returns?
Let’s go back to the definition again:
An asset is something that puts money in your pocket each month.
So what is a good investment?
Is a fancy car a good investment?
Most likely not!
Even if it’s a great car, it won’t put money in your pocket each month unless you rent it out on a service like Touro.
In general, the answer would be no.
What about a house you live in?
As we’ve gone over, a house is not considered an asset.
What about an investment property?
That can really be a good way to develop an asset and put money in your pocket.
What about the stock market?
In general, no.
Sometimes dividends can put money in your pocket, but there’s a lot of volatility.
And I think we’re coming to a time where we might start seeing more volatility.
We talked about single family rentals as another option.
Right now it’s hard to find anything that’s cash flow positive, meaning the rent is higher than what the mortgage would be.
Let’s go over an example:
A few years ago I had a small single family portfolio.
I was getting around $100/month per house.
I was hoping and praying for appreciation.
You need the value to appreciate, the rents to rise, and the value to increase.
One thing I realized through this is I undervalued the time I spent working on my real estate.
The time it took to look at deals, get the financial statements, and review issues added up.
I was paying money to property managers and still getting headaches.
They would still call me with minor issues they could solve themselves.
If you were to get 10 more houses, wouldn’t that be overwhelming?
If the answer is yes, then it’s really not a passive investment.
It’s not scalable.
It takes a lot of time to go get these things.
Really, time is the most valuable thing.
In some ways, we can all undervalue our time if we’re not trained to think this way.
Another great consideration is commercial real estate.
A recent survey on people worth over $100 million found that the highest percentage of their net worth was in commercial real estate.
One of the primary commercial real estate focuses for a lot of people is multifamily real estate.
Some of the advantages of multifamily include tax advantages where you pay no taxes or you can defer the taxes.
There’s an inflation hedge.
In the worst point of the great recession, large multifamily is a much more stable asset than single family.
There was a 10x less delinquency rate.
This means people were behind in payments 10x less in large multifamily versus single family.
Multifamily has much better returns and less volatility when compared to the stock market.
There’s also something special that we do in multifamily syndication:
We structure deals for passive investors.
It’s called a value add component.
We come into a property, do some renovations, and see some rent increases.
How do we do this?
As people move out, we do $8,000-$10,000 renovations and then we see a rent bump.
These bumps dramatically increase the value of the property.
If you’re interested in learning more about multifamily, we do events each month.
We talk about inflation or we talk about multifamily.
You can check out a video from one of our events here where we talk about what a great deal looks like.
Now I want to hear from you!
Do you think that owning is a bad idea or do you think you should do it?
Let’s start a conversation in the comments down below!
Before you leave, make sure to check out our special report about investing. It compares the stock market to real estate, and it also includes how the pandemic affects your investment future.
If you are interested in investing with us, we are happy to answer any questions that you may have. Join our investment club today and we will be in touch.
Disclaimer: I am not your investment advisor. This is for educational purposes only. I am not giving specific advice on what you can do. I am simply giving my opinions.
All makes sense.
I like all that you are saying in this article. I would like to run a scenario past you:
I currently rent in Altadena at $3000 per month.
This property has a back house that rents at $2500 per month.
I am considering purchasing from the owner, if willing to sell.
Potentially with a Subject To financing.
I understand my mortgage will be higher than my rent.
Yet the back house rental will cover just about all of it.
Now, there will most likely be a down payment (have not discussed details with landlord yet)
Yet I wonder if this property will appreciate to cover that down payment.
Also, my long game is to then turn this into a rental and get the hell out of LA.