Rich Dad says a home is a liability………

[Arn Cenedella]

Many investors quote Rich Dad to support their contention that a HOME is not an investment.

Often this is done as an argument to invest capital in their commerical real estate deal instead of buying a home. Let me also say, I love buying rental real estate. I own everything from single family real estate to 200 unit plus apartment complexes. I am PRO rental real estate ownership. 

This argument is simplistic at best and in my opinion often false because it ignores the cost of shelter.

If one doesn’t own a home they have to pay rent somewhere else, right?

Before looking at numbers. let’s frame the question by posing the following two questions:

1. If paying a mortgage payment is a liability, then what’s paying a rent payment? An asset?

2. As an investor, we are told it’s a great thing to have our tenants pay the mortgage. I agree.

But if an investor doesn’t buy a house, he is a tenant and laying that investor’s mortgage down.

There’s a logical inconsistency here. If it is good for YOU to have a tenant pay down YOUR mortgage, why is it good for YOU to pay down someone else’s mortgage? That makes no sense, does it?

Let’s look at some numbers:

Let’s compare rent v ownership numbers.

First, let’s recognize paying $3,000 in ownership costs AFTER TAX is equivalent plus minus to $2,000 a month rent. Often the after tax cost of ownership is equivalent to rent. And if you get a 30 year fixed rate mortgage, it is almost certain the cost of rent will go up much faster than the cost of ownership.

What about the down payment required to buy a house?

Let’s assume 10% down - one can actually buy a residence for 3% down.

Let’s say one buys a $300,000 house with 10% down.

That’s $30,000 investment.

Let’s say value of house goes up 5% per year.

After 5 years, the $300,000 house will be worth $375,000.
Equity increases from $30K to $105K in 5 years.

That’s a 50% annual increase in value.

Is that not a good return?

Run the numbers anyway you want.

At 3% annual value increase, rate of return is 30% annual return.

Buy a house first, get great long term debt and then start building your rental empire.

Don’t believe every real estate mantra you here, they often are not correct.