Bad Financial Advisor Advice: Your House Is An Asset
Why real estate can be both an investment and a liability
“If you don’t know anything, then any advice is better than no advice. But if you can’t tell the difference between bad advice and good advice, then that is risky.” – Rich dad
My rich dad believed that any financial advice was better than no financial advice. He was a man with an open mind, and he was courteous and listened to many people. Ultimately, however, he relied on his own financial intelligence to make his decisions.
Rich dad believed that people struggled financially because they make decisions handed down from parent to child, and most people don’t come from financially sound families. He often said that most bad financial advice was handed out at home, which is one reason I am an advocate for financial education in the home.
Of course, for most people, while financial advice starts in the home with old rules like go to school, get a good job, save your money, buy a house, and invest for the long term in a diverse portfolio of stocks, bonds, and mutual funds; it doesn’t end there. Many people also take the bad advice their parents give them and compound it with bad advice from financial advisors as they get older.
Rich dad on advisors
When it came to financial advisors, rich dad said:
“Your advisors can only be as smart as you are. If you are not smart, they can’t tell you that much. If you are financially well-educated, competent advisors can give you more sophisticated financial advice. If you are financially naïve, they must by law offer you only safe and secure financial strategies. If you are an unsophisticated investor, they can only offer low-risk, low-yield investments. They often recommend diversification for unsophisticated investors. Few advisors choose to take the time to teach you because their time is money. So if you will take it upon yourself to become financially educated and manage you money well, then a competent advisor can inform you about investments and strategies that few will ever see. But first you must do your part to get educated. Always remember, your advisor can only be as smart as you.”
Often, because people do not have a good financial education, they find advisors who they think will make their financial decisions for them. They take this advice wholesale and without question because they have no way of knowing if it’s good or bad. They assume that it’s good because it comes from an expert. But often, it is not good. In some cases, it’s very bad.
Bad financial advisor advice: Your house is an asset
Many financial advisors will tell you that your house is an asset, but that is untrue. The fact is that when financial advisors say this, they are not really lying, but they aren’t telling the whole truth either. While your house is technically an asset, they just don’t say whose asset it really is.
If you look at a bank statement, it becomes easy to see just whose asset your house really is—the bank’s asset. Remember rich dad’s definition of an asset, “Anything that puts money in your pocket. A liability is anything that takes money out of your pocket.”
Most people do not own a home…they own a mortgage. Those who are financially educated understand that a mortgage doesn’t show up in the asset column on the financial statement. It shows up as a liability. But it does show up on your banker’s balance sheet as an asset as you pay the bank interest every month.
What if my house is paid off?
Many people ask, “What if I pay off my mortgage? Is my house an asset then?”
In most cases, no. Even after you pay your mortgage, you still have to pay money every month in the form of maintenance costs, taxes, and utilities. And if you don’t pay your property taxes, guess what can happen—the government can take your home. So, who owns your house really?
Real estate as an asset
I’m not saying that a house can’t be an asset. I’m just saying your house isn’t an asset. Real estate is a great investment vehicle, but unless you're putting money in investment real estate, it doesn’t become an asset. Your personal residence is important and should be bought under the considerations of what you love and where you want to live. Don’t think of it as an investment.
That being said, if you do want to invest in real estate, I encourage you to learn more about it. Real estate is a wonderful way to invest. Good real estate investments cash flow each month and provide significant tax breaks. Sometimes, they even go up in value, but that should not be your primary motivator.
If you want to learn more about real estate investing, our free real estate investing webinar is a great place to start.
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