A Sour Money-Making Opportunity

A Sour Money-Making Opportunity
by Oliver Butterick

I do not own my home. I’m a renter, but not by choice. About a year ago, I was downsized and decided to sell my house and an investment property. I can remember the day I bought my first house. It was so amazing--I had a place that really, really was my own and it was the largest asset that I had. Finally, I was going to stop throwing away my rent money and instead put it into something that would be working for me. Or so I thought.

No, I’m not going to retell the story that was comedically portrayed in The Money Pit. This story isn’t quite as funny. You see, I was always taught that owning your own home was a great thing--one of the things that poor people couldn’t do. Having grown up poor, you can imagine what being able to buy my home must have felt like. But I wasn’t told the whole story.

You see, I went hiking in Malibu a few months ago with some friends. One friend and I got into a discussion about home ownership. As you already know, I’m a big fan. I expound on the virtues of home ownership: investing in something that will (or at least should) appreciate, taking advantage of the tax benefits, and most importantly, taking money that you would already be spending on rent, and putting it into something that will, in the end, benefit you.

She was not of the same opinion. While I viewed my home as an asset, she insisted that it was a liability. She said that people sink money into their homes, and this made them a liability. I argued that putting your money into your own home is much better than buying someone else’s home for them by renting. Plus, your house is something of value, and that makes it an asset. We were at an impasse, neither willing to yield our respective positions.

Fast forward to yesterday. I took my car in for an oil change and to have the tires balanced and rotated, so I had some time to kill. Remembering that I wanted to buy a book for my girlfriend, I spent some time browsing the shelves of Barnes & Noble. I made the rounds through my usual sections: SciFi/Fantasy, Philosophy, and Business/Management. When I reached this final section, I picked, and ended up buying, a book that I had considered buying many times before, Rich Dad Poor Dad, by Robert T. Kiyosaki.

This book was first recommended to me by a woman who tried to get me to buy into some multilevel marketing company. Having already made that mistake (MLM) as a young adult, I politely declined, and figured that the book was complete crap. However, this title seemed to creep into conversations over the next several years, most recently with a friend of a friend who made it the practice of supplementing his income by buying undervalued properties, fixing them up, and selling them at a profit. He was well respected by my friend, and he was a big fan of the book. So I finally decided to give it a go. I figured, “What’s twenty bucks and a few hours of my time?”

The time and money was worth the investment. I’m not going to give a complete review of the book, though I nearly finished it yesterday evening. I do, however, want to shed some light on the subject of home ownership as an investment.

First off, Kiyosaki admits that owning a home is better than nothing, when it comes to growing wealth. However, he presents evidence that suggests that developing an investment portfolio is much better than buying a house. His argument begins with the definition of an “asset,” which, in short, is “something that generates income.” This is very different than my notion of it being “something that has value.” He then launches his main argument, which I have paraphrased here, and can be found on pages 73-74 of his book.

Most people never end up owning their homes. They either trade-up into more expensive homes, refinance their loans, or take second mortgages, which all (usually) return the term of the loan to thirty years. They pay their mortgage each month, making their home a liability, not an asset.
Homes are bought with dollars that have already had income taxes and other payroll taxes taken out. Yes, interest might be a tax deduction, but does it build your equity? No. You don’t get anything for the interest. People spend nearly half the year working to pay their greedy Uncle Sam before they actually get to see the fruits of their labor.
Property taxes further increase homeowners’ liabilities. An unexpected increase in property tax could prove disastrous to the average American, who lives from paycheck to paycheck. Have you ever heard of property taxes actually decreasing? I haven’t.
Houses do not always appreciate in value. Though this may be difficult to imagine for a Californian who bought a house a few years ago (as I did), but a quick look at home values over the past twenty years will show this to be true. In fact, some analysts have declared that the real estate boom is over, and have noticed a decline in over-inflated home prices as of late.
The greatest loss is from missed opportunities. Having all of one’s income tied up with the obligation to pay the expenses of owning a home, there is often nothing left to purchase assets, which increase income. This factor is even more compelling in the argument for saving to purchase a car with cash instead of on credit. If you invest saved money, it will grow. Plus, you won’t pay interest to buy the car, so it ends up costing roughly half the price. Why everyone (including myself) doesn’t do this is just crazy. It’s likely a result of our addiction to instant gratification.

Kiyosaki explains several other factors in growing one’s wealth and becoming rich, and most of his advice, unlike this section on owning one’s primary residence, is intuitive. I can’t say that I’ve bought into it completely, but at least I understand that owning a home is not the sweet money-making opportunity I once thought it was.

Oliver Butterick can be reached at oliver@babblog.com.