Why Your House Is Not An Asset

Why Your House Is Not An Asset


Many people believe that the home they live in should be considered an asset. However there is a school of thought who is adamant that your home is a liability. A simple way of looking at it, popularised by Robert Kiyosaki (author of Rich Dad Poor Dad), is to focus on cash flow.

From a cash flow perspective, anything that increases our cash balance would be considered an asset. Anything that decreases our cash balance would be considered a liability. In this alternate way of looking at things, an asset is something that puts money in our pocket and a liability is something that takes money out of our pockets.

The law of liabilities

So our house, even if it is paid off, is still a liability. Why is that so? We still have to pay rates, levies, insurance and maintenance on our homes. So they are actually costing us money.

Many people may protest and state that the value of their home will increase over time. However, this is not always the case. South Africa has over the past decade had a property boom which has resulted in home owners making substantial gains in property value.

It would be naïve to believe the growth achieved over the past decade would be constantly achieved in the future. There are many homeowners who are currently in financial distress as they owe more on their homes than what they’re worth.

Related: Peace-of-Mind Financial Planning

Not an investment

The value of your home may be irrelevant. You only receive the value of the home when you sell it. Many people retire in their home and will live there until they pass away, so their heirs will receive the benefit of the increased value of the property.

Our biggest monthly expense is probably our monthly bond repayment. And for many people, having to pay off a bond will take away the ability to invest in assets that provide an income.

The cruel truth for most people is that their home is in fact not an asset but rather a liability. The point of this article is not to discourage you from buying a home, but rather to make you aware that you could make a serious financial error if you are purchasing your home with the idea that it is an investment.

Financial independence

To have future financial independence, we should have income from multiple sources. In order to do that we need to increase our assets by investing in shares (which pay out dividends) or perhaps purchasing a property which is rented out by a tenant and produces a positive cash flow after all costs have been taken into consideration.

Or even studying further, which could enable us to earn a higher salary. Financial independence will not come from purchasing multi-million Rand homes, purchasing boats and motor cycles, and using every penny to pay off our debt.

Related: When Should You Start Panicking About Retirement?

Andrew Padoa
Andrew Padoa works in the Private Client’s division at Consolidated Financial Planning. His area of expertise is investments, estate planning, retirement planning and portfolio benchmarking. He has had numerous articles published in the media on a number of topics related to personal financial management. Andrew is passionate about educating people and has given several financial literacy talks to both schools and corporates. His objective is to use his abilities and knowledge to help others achieve their financial goals. Visit www.consolidated.co.za for more information
  • If you make up your own definitions for ‘asset’ and ‘liability’ then you can do what you want. You could call those definitions apples and saucers for all I care, but in the real world, there are already preexisting definitions for assets and liabilities and those are used in the compilation of a balance sheet.

    • Knowledge Elisha

      in finance and accounting an asset is defined as ” a resource which a
      firm owns or control, the use of which result in an inflow of economic
      benefit” and a liability is an ” obligation, which at settlement results
      in an outflow of economic benefit”. if your house result in an inflow
      of some economic benefit, its an asset but otherwise its a liability

  • He has used a ‘simple unconventional’ definition from Robert Kiyosaki’s book so in my opinion being quite valid.

  • Juanvs

    What rubbish! You still have to stay somewhere and accommodation is not cheap. So you would rather pay off someone else’s property and have nothing to show for it at the end of the day? Consider what you would pay to replace your rented accommodation with your own property. Even if you have to pay slightly more, it is still yours. Over time it will appreciate in value and provide security in hard times. You may use it as leverage to acquire another property or buy a business. If you have nothing, the banks and financiers will find it very hard to provide finance for any project that you may want to embark on.
    I have a problem with financial advisers who know nothing about economics and twist the facts in order to sell their products.

  • Marno Slabbert

    Which would be the bigger liability ..? Paying off a home the smart way by not over extending oneself, controlling cost, paying off debt, keeping a good credit score, being able to pay in more which is “saved” and you can use it if you want plus reducing interest, not having the costs and waste off time to move when the owner of the house you rent decides to sell the property etc etc OR never owning, always renting, and ending up with the same cash flow anyway!

  • If you buy your house cash and then the price went up after few years then I say you made a good money, but this is not the case most of the time, some people can only afford 5% or even zero percent down. In this situation, you basically burn all your money to the interest. Remember if you have a house you have to pay interest rate, utilities, insurance, property tax, maintenance, upgrades and so many unseen expenses ( you should anticipate to replace your ac, furnace, roof, painting, plumbings, appliances, gardening expenses and many more) and if you breakdown these expenses in monthly that would be around $400-$500. Most of the people who have houses actually don’t have money, they just merely rely on the equity but what if the price of the houses plunged? then your screwed. Another thing is the “STRESS” most of the people who owns houses have lots of financial stress and emotional problems. Again the above statement is not applicable to everyone, people who earns good money may have different case, but most of the people are making just above minimum wage. I’m not saying that you don’t buy a house but make sure that you’re in the right financial situation in case you have to do it. The good thing with house is that you will have a place that you will call your OWN but it is NOT an investment, because when you say investment you are about to make a profit and as I’ve said before you will be pouring out a lot of money just to maintain your (house) investment!