An Australian friend visited me over the weekend in Ibiza and he mentioned he was planning on buying a property in Melbourne to live in. He thought it was a smart investment for his cash and he was surprised to learn I thought otherwise. I also have been asked about homes as investments on recent webinars that I have done too so I thought I would address it more fully here.
Why Your House Is Not An Asset
“Your house is not an asset.” When Robert Kiyosaki said this in his book, ‘Rich Dad Poor Dad’ (1997), he caused quite a stir amongst financial experts.
Two decades later, some parts of the world are still recovering from the global recession caused by a crash in the housing market, and people are beginning to realise that there might be some merit to this statement.
“House” here refers to your primary residence, not an investment property that is being rented out.
However, many people still believe that their house is an investment. Your home is many things, a shelter for your family, place of security, but it’s not an asset.
So why is your house not an asset?
It doesn’t generate cash flows
If we look at an asset as a resource that generates cash flow and a liability as something that is a drain on cash flows, then it becomes clear why your house should not be thought of as an asset.
Even if you are mortgage-free and own your home, you still have to pay for upkeep, taxes and utility bills. This means your house is not making money but taking money out of your pocket. It’s a drain on your funds and, in actual fact, a liability.
If you do have a mortgage, then your house is the bank’s asset. In this circumstance, your house is working for the mortgage provider and is not earning you a single penny.
You might think that you can get cash out by borrowing against your home, i.e. re-mortgaging to release some equity. However, this is a false perception of security as all you are doing is creating more debt. At some point, this borrowed money will have to be paid back.
Value appreciation doesn’t make it an investment either
Many people believe that because they sold their house for more than the initial purchase price, they automatically made a good investment. Let’s look at a simple example.
Say you bought your house 10 years ago for £180,000 and you decide to sell it now for £210,000. You might think, great, I made £30,000 on my 'investment' - £3,000 p/a return, not bad, right?
But if it costs you £1,000 per month for your mortgage, home insurance and life insurance plus another £200 per month for services and utilities, that’s £144,000 over the course of 10 years to walk away with £30,000.
This is assuming house prices have increased steadily over the period and not taking into account any routine or major repairs. That’s not a good investment.
Is your intention to sell?
Very few people buy their primary residence with the intention to sell it again in the near future. And even if you do sell it at a reasonable profit, that money will most likely go towards buying a new home. Not necessarily to fund your lifestyle, pay for your children’s education or to go on a luxury holiday. It is trapped equity and therefore can’t be considered as an investment.
There are many good reasons to buy a home - I love my home and the sense of security it gives me and my wife - but I do not consider it to be a reliable asset and I don't think of it as a savvy investment. For that, I look to other investment options such as low-cost tracker funds.
The moral of the story is, as Robert Kiyosaki would say, “Invest for cash flow, not appreciation.”
THE INVESTING COACH RECOMMENDS...
I think 'Rich Dad, Poor Dad' by Robert Kiyosaki will change your perspective on your personal finances. It certainly had a big impact on me and I regularly go back to it.
You can buy the book by clicking on the link below: