Last week we kicked off the first in a monthly series called, "Ask Robert". It was fun to see all the questions asked, and hard to choose which one to answer. We'll be doing "Ask Robert" once a month, so start thinking now about your questions for the next installment. In the end, I answered Martin's question on whether to put his savings into paying off his personal residence or to invest in a rental property.
My response to Martin was that it's always preferable to invest your money into a cash flowing investment instead of paying down a mortgage on your home—especially in a market that is declining. Interestingly, I came across an article in The New York Times this week on real estate entitled, "Real Estate's Gold Rush Seems Gone For Good". The article highlights what I've been saying for over a decade since the publishing of my book Rich Dad Poor Dad: Your house is not an asset!
Here are some interesting statistics from the article:
That last statistic is frightening to me. Financial ignorance is so high in our country that we still believe that a house is an asset and a sure way to build wealth. It's not.
Your house is a liability
Since the lesson still hasn't sunk in for many Americans, I'll repeat here: Your house is not an asset. It's a liability. Very simply, an asset is something that puts money in your pocket. A liability is something that takes money out of your pocket. The reason people are confused and think that a home is an asset is because from the 1970's through the early 2000's they were able to pull money out of their house in the form of loans, like a real estate ATM.
As The New York Times article states: "The wealth generated by housing in those decades, particularly on the coasts, did more than assure the owners a comfortable retirement. It powered the economy, paying for the education of children and grandchildren, keeping the cruise ships and golf courses full and the restaurants humming."
The problem is that wealth wasn't generated. Only debt. People didn't sell their homes to pay for things like college educations and vacations; they borrowed against them. In the process they bought into the illusion that they were tapping an asset when in reality they were growing a liability by taking on more and more bad debt.
It's amazing to me that people still think their house will gain value given the true statistics about the housing market. The reality is that the housing market will take decades to regain value—and may fall in value in the short term—and most gains will only be keeping up with inflation. Buying a home and counting on it to be your retirement is financial ignorance and recklessness at its worst.
How a house can be an asset
Despite the fact that housing prices may never actually recover in real terms, I'm buying. This may sound contradictory, but it's not. As you may have guessed, I'm buying investment properties that cash flow.
To me it only matters if a little property appreciates in price. I care only whether it provides cash flow every month. And while investing for cash flow won't provide the home-run returns that speculators saw in the early 2000's, it's the only sure way to build wealth and assure a secure retirement in terms of real estate investing.
For many, the fact that housing prices might drop again is a bad thing. For me it is exciting. It means that more deals will be out there for great properties that bring in money every month in the form of rent. As I've said before, we're experiencing the greatest wealth transfer in history. If you're smart with your money, wise in your looking for deals, and ready to make a move, you can find great investments at bargain prices.
The key is to make your money on the buy, not the sell. What I mean by that is that by doing proper due diligence you can find deals that will provide substantial cash flow for years to come. By doing so you don't have to worry about the price of your asset. If it goes up, that's a bonus. If it doesn't, you still have a great property that puts money in your pocket every month.
Your house is not an asset. But a house can be an asset—if it cash flows.