“Repeat after me: Your home is not an asset.” ~Robert Kiyosaki
Growing up poor, and not having any personal finance education by my parents or school, I thought the American dream was to graduate from college, get a good job, and buy a home. Then you save money until you’re 60 and retire. School taught me that this was the American dream, and the cornerstone, the “you made it moment,” was buying your own home. Most of us learn the same thing, and it’s wrong.
Robert Kiyosaki wrote Rich Dad Poor Dad in 1997 and his book was one of the first mainstream financial books exposing what was wrong with the American dream—specifically, buying a home. I read his book in 2006, and it changed the way I looked at the world. Most Americans idolize college, and this created the massive student loan bubble we’re facing now. After graduation, we encourage people to work hard for a company, which creates employees who slave away their lives, paying increasingly higher income taxes. People are then encouraged to take their taxed income and go into debt to buy a home. This is the American dream.
Prior to the 2008 housing financial collapse, it was believed that housing prices would always go up and, with interest rates being the lowest in decades, not buying a house was folly. Despite growing up low-income, my parents bought a house in the early ‘90s under the same premise; they ultimately foreclosed on the home when they divorced. And yet my 17-year old mind couldn’t fathom how the perfect investment could be foreclosed on. After getting my business administration degree with a focus on economics, I understood the math behind it; after reading, Rich Dad Poor Dad, I understood the psychology behind it. And in 2008, when housing prices collapsed by 50% and the America lost $10.1 TRILLION in home prices drops and stock market losses, everything I learned was confirmed.
My final conclusion: Your home is not an asset! Let me explain.
For the last two decades, I’ve seen this continuous cycle of college debt, finding a job, then buying a home. We saddle ourselves with college debt, and to learn how to be an employee. Then we’re told to seek the highest-paying job, often times at the sacrifice of our mental wellbeing, physical health, and family relationships, wherein we use our highly taxed income (see Chapter 3 for details on salary taxes). to buy a house. Oftentimes houses are 4-10 times our annual salary, and to “afford” them, we are encouraged to take out amortized loans. Are you envisioning the cycle I’m talking about? It’s a vicious cycle that constantly pushes us to go deeper into debt by getting a higher degree (with more debt), working harder for a higher paying job (with more personal and family “debt”), and then buying a bigger house (with more debt).
Why does nothing change? It’s because we’re told buying a home is buying an asset. Until this philosophy is changed, this vicious cycle will continue. In Chapter 6 – Assets and Liabilities , I mentioned the equity in your house is an asset. The equity is the difference between the value of your home and how much you owe on it, and yet we have somehow made buying a home synonymous with building equity. Furthermore, we’re told that housing prices tend to generally go up. So, if you pay your mortgage every month, for 30 years, and the house’s value goes up, you’re building equity, which is a good thing right?
Again, this is what the “system” wants you to believe. Most housing loans are 30-year mortgages, but in the last decade, 15-year mortgages have become popular among the slightly more financially literate and advantaged. We often demonize banks for the way mortgage loans are structured, due to banks front-loading the interest in the first half of the loan, with very little going to the principal portion of the mortgage. But remember, banks take on huge risks by giving loans 4-10 times the annual salaries of the applicants. Banks hold the liability when owners default on their loans.
Front-loaded interest is one of the reasons why a home is not an asset. We take out very large loans and very little of the payments actually go towards principal for the first 5-10 years. Like I mentioned above, the only asset your home provides is in equity. If equity is the value less the mortgage, the monthly mortgage payment does very little to pay down that mortgage. To bring in everything already mentioned, the student loans we take have interest, to get us the good jobs which are highly taxed, and then we buy a house where very little of the mortgage payment actually goes to the mortgage.
So, while home equity is literally considered an asset, it’s only an asset when you’re calculating your net worth. I talk more about net worth in Chapter 6 – Assets and Liabilities, but your net worth doesn’t mean a lot; it’s just a measurement. Equity in the asset column isn’t working for you, and remember the key to financial independence is to make assets work for you. Some people call home equity a “Lazy Asset” meaning it does little to advance your financial position. One of the benefits of having home equity is the ability to take out a different loan called a Home Equity Line of Credit (HELOC). So, our “vicious cycle” basically says, go into debt by buying house so you get the pleasure of going deeper into debt?
BUYING A HOME IS IMPORTANT
The intent of this chapter is not to prevent people from buying homes. My intent is help people understand that buying a house is not a cornerstone event in a plan for financial independence. It is NOT investing in real estate. Investing in real estate typically implies a rental property earning rental income. Buying a home, or rather, the process of taking out a massive loan, should not be a key objective. It’s strange that when someone takes out a massive loan to buy a house, we praise it on social media. Congrats! You made it. We need to change the narrative and here’s how:
- We need to teach kids about loans and amortization. We need our culture to promote not exceeding 30% of annual income to all housing expenses at a young age. And we need to teach how credit scores work BEFORE getting credit cards.
- Your loan paperwork should have the value of the loan you’re getting and also the amount you’ll pay at the end of the home loan. For example, I took out a 30-year $219K mortgage at 4.35%. If I paid the mortgage for the whole 30 years, I will have paid a total of $488K ($173K in interest). Go to this site and enter your mortgage details to see what your current or future loan is. https://www.mortgagecalculator.org/
- We need to talk about home loans just like we talk about credit cards or student loans. Instead of mortgage payment, we should say minimum payment. It’s unorthodox to hear people paying their mortgage off early. We need this to be normalized.
- When taking out a mortgage, there should be one page per cost. For example, there should be a whole page explaining what Premium Mortgage Insurance (PMI) is and how it impacts the loan value. There should be a page on insurance and property taxes too.
- There should be an amortization table that people should have to initial on Year 1, Year 15, and Year 30 to show how much interest would be at the end of the loan.
- We should all strive for no more than 30% of our income for housing, a 20% down payment or a plan to quickly get to 20% equity-to-loan-value to get rid of PMI, and pay off mortgages early. If all three of these conditions aren’t met, then you shouldn’t be counting your home purchase as an investment.