Not all "Houses" are Liabilities.

Hi Friends,

You will find on the internet that a house is a liability. People tell you that a house is a liability and it gets you to thinking that if a house is a liability then this is bad. Yes, that is true that a house is a liability but it is not a liability all the time. Here’s why-

To understand this you need to know about 5 words. The 5 words are Assets, Liabilities, Cash Flow, Income Statement, Balance Sheet.

Diagram:

So, what is a Balance Sheet?

The lower part of an income-statement diagram so called because it’s supposed to balance assets against liabilities.

What is an Income Statement?

It means income and expenses: money in and money out.

What is Cash Flow?

Cash coming in (as income) and cash going out (as expenses). It is the direction of the cash flow that determines whether something is income, expense, asset or liability.

What is an Asset?

Something that puts money in your pocket.

What is a Liability?

Something that takes money out of your pocket.

The reason why your home is a “liability” is because of the cash flow. When you own a home you will have many expenses. The expenses include your Mortgage payment, Homeowners insurance, Mortgage insurance, Property taxes, Closing costs, Utilities, Maintenance. The definition of a liability is something that takes money out of your pocket. When you own a home, your expenses are owned by you too. You pay your own expenses. Here your house is taking money out of your pocket. The cash flow is going towards expense row of the Income Statement table. This is why a house is a liability. It is not an asset. Remember assets flow cash into your pocket. When you own a house and live in it or because it is empty it doesn’t produce income. This is not producing money for you. These instances that are afore mentioned only make you pay money for them and donot provide you with any earning. That is why a house is a liability.

If you look at the figure above, you can see that the “arrow 1” which tells where the cash is flowing is going is going to the expense row of the Income Statement. This tells that the house which is a liability is taking out money out of your pocket because it is making you spend money. The full picture is shown be “arrow 2.” The “arrow 2” shows that the money from your income goes directly to the expense row (which includes Mortgage, Property Taxes and repairs) to pay for your liabilities column (house) in the Balance Sheet.

Bonus:

So what should you do? Should you not buy a house?

There are many people who tell you that you should not buy a house and rather than that do x,y,z.

A house being a liability doesn’t make it a bad thing. It’s just to make you know that what an asset is and what a liability is.

And it is Rule number #1 (mentioned in the Rich Dad Poor Dad book) that you should should know the difference between an “asset” and a “liability.” If you want to be rich, this is all you need to know. It is the only rule. This may sound absurdly simple but, most people have no idea how profound this rule is. Most people struggle financially because they donot know the difference between an asset and a liability. “The rich acquire assets. The poor and the middle class acquire liabilities that they think are assets,” said rich dad. (These are net my words. These are the things that I have learnt and told in the book)

Knowing if a house is an asset or a liability will only be useful if you want to be rich.

What should you do according to “Rich Dad Poor Dad book”?

“I am not saying don’t buy a house. What I am saying is that you should understand the difference between an asset and a liability. When I want a bigger house, I first buy assets that will generate the cash flow to pay for the house.” The author of the book says that.

On a side-note: If you want to learn financial education that is not related to academic study and a lot of more things along with bonuses, then you can subscribe to my newsletter and kick start your journey of financial education, click the link below.

In this newsletter you will be able to read the differences between assets and liabilities and understand what will help you do it by yourself too. In this one I go into details of many things besides today’s topic. You should check it out. Click the link below.

<add the link where you `have written the definitions of assets and liabilities the big one>

Back to the topic.

Owning a home is not bad but a bigger house means bigger expenses and the cash flow keeps going out through the expense column.

If you want to be rich why should you know that the the home you live in is a liability?

A home is a liability because it takes out money of your pocket not only with taxes and expenses but because of its loss in value and the opportunities missed when all your money is tied up in your house.

The things that you will get when you will know if your house is a liability-

Again, I cannot help but say that the main thing to keep in mind is that if your house is a liability it doesnot mean anything. It’s not bad. The author doesnot say that don’t buy a house. It’s your choice. The only thing is if you want to be rich and also own a house, first buy assets that will generate the cash flow to pay for the house.

Now you may have thoughts in mind that, Oh but I see him do that or Oh my friend told me to do that or people are saying that I should do it.

So, when you have to face these types of things and if that’s on an important aspect of your life, then I recommend you tell yourself this and act accordingly-

1. When you need advice, make sure you choose your advisor wisely.

2. Don’t do what others are telling you to do. If that’s what you really want then go ahead and do that. If that isn’t make sure to protect yourself from causing the harm. Do what you really want to do and then do what’s necessary.

The opportunities that you are going to miss are- When you will start to buy assets that will generate income and later after some time when there are enough assets to generate more than enough income to cover expenses, the Balance Sheet is reinvested into the assets. Which produces more income. The result is that the rich who understand the difference between assets and liabilities get richer. These are the opportunities that you will be missing on because it will be hard for you to buy assets and also pay for liabilities at the same time, especially when you have only one source of income and less amount of money.

Booster Section: As a thankyou to read it fully

The only houses which are liabilities are houses that take money out of your pocket.

Let’s put what you’ve learned to the test.

Let’s say you have five houses.

The first house is the house where you live in.

The second house it the the house that has no people living in it.

The third house has people living in it and it pays you rent which means that it is an asset but still you have to pay little bit of money out of your pocket. Let’s say $1 you spend as expense for this house after paying all the money for the house from the rent.

The fourth house is the house which has people living in it and it pays you rent but the thing is that after paying all the expenses of the house the income from that house is only $1.

The fifth house consists of people who live and pay rent. Here you get an income of $1000 after paying all the expenses of the house.

Which one of the houses are assets and which ones are liabilities?

Take some time and think about it before answering the question. There is another secret hidden here. If you can give the correct answers with the correct reasons then you have understood what you learnt.

The first, second and the third house are liabilities. Even though the third id taking $1 out of your pocket it is a liability. It doesn’t matter how small amount of money comes out of your pocket, if any money is taken out of your pocket then it is a liability.

It is as same as the third house when we are talking about the fourth house where you earn $1 after paying all the expense, but the only difference is that here you are earning money. It doesnot matter how small amount of money is coming to you that house will be an asset.

And the fifth house is an asset.

So to end, the main thing is that-

Not all houses are liabilities. It is top be kept in mind that if the house is taking money out of your pocket it is a liability. If the money is coming to you then that house is an asset. It is where the money is going i.e. to Income row or Expense row. That’s all you need to watch out for.

Thankyou to the people who read it to the end. Comment to tell me what you thought about it. Also tell that what were the things that you learned today after reading it. If you found it helpful and also want to help your friends become financially educated then share with them.

Did you know that-

Humans can be liability

A child is a Liability

A car is a liability

If you wonder why it is then I recommend you read the entire newsletter once again or comment to make a separate newsletter And I will make one.

IF you want to read more like this then here are some links to other newsletters of mine:

Click the link to access them:

Why house was considered a “Profitable Investment” in ancient Babylon

The Five Laws of Gold according to The Richest Man in Babylon