What is a true asset to you?

[Jorge Vazquez]

What is an asset? 3 expert opinions that are radically different from each other

Philosophies from Robert Kiyosaki (Author of Rich Dad, Poor Dad), Robert Allen (Author of Nothing Down), Chip & Joanna Gaines (Fixer Upper TV Show)

What is an asset? What is a good investment? These are some of the first questions people ask on the path of financial literacy. These are evergreen questions and everybody deserves to have clear answers.

Sometime ago, I decided to take a sabbatical from work for a while. I didn’t exactly know what I was going to do but I knew that I needed a break. I needed a different perspective: a paradigm shift on how I looked at things. A few days into my sabbatical I went to the local library to look for something interesting to read. I found myself strolling through the finance and real estate section. Two books caught my eye: Rich Dad, Poor Dad by Robert Kiyosaki and Nothing Down by Robert Allen. I checked out both books and read them within the next few days. I enjoyed reading them tremendously. Even though I knew the content, seeing it through the author’s lens allowed me to get the bigger picture. It was almost as if all this time, I was looking at it from a worm’s eye view and all of sudden I had a bird’s eye view of the subject.

Upon finishing the books, I realized how there’s no concurrence on even the most basic definitions of them all: What is an asset? Both these experts had different answers.

Here are the 3 definitions of an asset:

Robert Kiyosaki (Author of Rich Dad, Poor Dad) says, An asset puts money in your pocket. A liability takes money out of your pocket.

Kiyosaki is good at simplifying complex concepts. He manages to break things down into their most basic form. I liked his easy to understand definition of an asset: An asset puts money into your pocket every month. A liability takes money from your pocket every month.

Based on this definition, if you buy a single-family home for yourself, it's not an asset. If you buy an antique car, it’s not an asset. If you buy a Renoir painting, it’s not an asset. All of these purchases cost you money on a monthly basis. A home that is purchased with financing costs you a mortgage payment. An antique car needs to be serviced. An expensive Renoir painting will cost a fortune in security and insurance premiums each month.

However, we have always been taught to believe that these are great assets! Robert Kiyosaki makes a follow up observation. Your house is an asset for the bank, your car is an asset for the mechanic and your painting is an asset for the security company. After all, they put dollars in their pocket whilst burning a hole through yours. Kiyosaki flirts with conspiracy theories to drive his point home: the government is a bogeyman who wants to keep people uneducated by not teaching children about money in schools so that the rich can make more money. Even though the logic is specious, Kiyosaki’s sincerity makes it sound true.

Kiyosaki’s definition of an asset is based on just one dimension of Wealth: Cashflow.

Robert Allen (Author of Nothing down) says, An asset is something you can buy with nothing down.

Few people have been able to popularize the concept of Nothing Down better than Bob Allen. He talks about purchasing properties subject-to the underlying financing or with owner financing. The common thread being: he will buy the property with nothing down. He makes it a fair exchange: in return for nothing down, he is willing to pay a higher purchase price or higher interest rate on the loan. Although I haven’t met many investors who have consistently bought properties with literally nothing down but the concept is doable. I’m sure there will be sellers who will sell houses with nothing down as long as they get a premium on the price.

Even though there is more to this, the overwhelming focus of this strategy is to come up with no money out of pocket. The reasoning being, if you don’t bring anything to the table, you have a lot less to lose. The less you bring to the closing table, the greater the leverage. With more leverage, you can maximize your cash on cash return. If you bring nothing down to the table and the asset cash flows positively, you make infinite cash on cash return (anything divided by zero is infinite)

Allen’s definition of an asset is based on just one dimension of Wealth: Leverage.

Chip & Joanna Gaines (From the TV show, Fixer Upper) say, An asset is something that appreciates.

My wife loves watching house flipping shows on TV. One of her favorites is Fixer Upper starring Chip & Joanna Gaines. I have spent many evenings watching them transform a property from undesirable to gorgeous. The theme of the show revolves around the reality stars buying a rundown home and turning it around by fixing it up. By the end of the episode, the house looks extraordinary with several buyers wanting to buy it. The couple always makes money by selling the house.

Here’s the economic premise of the show: Buy a house for a discount, rehab it and sell it for a premium. I have written a detailed article on the secret on flipping houses. It relies on ‘forced appreciation’ that gets created by buying the property at a discount. If you overpay at the time of the purchase, you will lose money. The deeper the discount at the time of the purchase, the more profitable the flip will be. This is because of the appreciation between the purchase and the sale price.

The Gaines’ definition of an asset is based on just one dimension of Wealth: Appreciation.

Synergy: Putting the parts together to create value

There is an old parable about 6 blind men and the elephant. None of them had encountered an elephant in their lives. All of them touch one part of the elephant and mistake it for something else. One of them touches the ear and thinks it's a fan, one of them touches the trunk and thinks it's a snake, one of them touches a leg and thinks it’s a tree trunk and so on. In the end, they all put the pieces together to get the bigger picture and they understand what an elephant is.

Conclusion

All the definitions of an asset mentioned above are partially true. The synergy of investing lies in combining all 3 dimensions together: Cashflow, Leverage, and Appreciation. Knowing all the three dimensions allows you to embrace investments that may be light on one dimension but heavy in another. Financial literacy begins when you know all the pieces and how to maximize their value.