According to Rich Dad, Poor Dad author Robert Kiyosaki, a primary home is categorized as a liability because of the debt obligation that you have to pay down. However, after the home is fully paid off or has built enough equity, it becomes an asset due to the appreciation. For some people, their primary home is the biggest asset that they’ve accumulated in their lifetime, other than stock options or their business. For me, primary homes are an asset, not a liability.
The answers might vary depending on who you talk to. I view it as a very safe asset for the majority of us! Rich Dad Poor Dad’s Robert Kiyosaki says it’s a liability because of the debt (mortgage) you get when buying a home. He’s also a very high-level investor, so he sees it as a liability which I can understand.
However, for the majority (who might own less than five investment properties), a Primary Home starts as a liability, but it becomes an asset over time, especially when you 1. cash out refi with the built equity 2. sell and realize the gain.
Oftentimes, I see my seller clients have built very good equity after living in their homes for 5 to 25 years and their homes are the biggest assets that accumulated with equity and mortgage payment reduction. Most of the time, it’s a great thing. Of course, many of them could have done better by reallocating some of the equity gains and diversified along the way, but at least it’s an asset that builds and grows for all of them.
On the contrary, if you’re renting over time, you are giving away the opportunity to grow equity and build wealth. Your landlord will take that opportunity and run with it. With the current skyrocketing rental prices, the opportunity cost loss is even bigger for renters.
So in my view, owning a primary home is the first step to start investing and is going to open up other investing options in the near future. This is why I am an advocate for individual home ownership. For most of us, it is a very sound investment strategy.
Another reason why it’s a wealth building asset is because you can leverage. Not many banks would lend you money if you want to buy $500,000 worth of stocks. If you are buying a primary home, you can borrow up to about $482,500 (96.5% of $500,000) and pay the rest 3.5% out of your pocket, plus about $10,000 in closing costs.
Individual home ownership is going to become more important as Wall Street is buying up the residential real estate to hold as longterm assets to generate revenues by renting out. This reduces the number of homes that regular home buyers can buy and creates more competition that drives home prices out of reach. Because of this problem, countries like South Korea limit investor purchases heavily.
So start saving your downpayment and closing costs (total around 5-6% of the home prices in your market) and look for a good opportunity to buy your first home when you have a steady income and plan to stay in your city for 2+ years. You’ll thank me later.