Many people consider their family home to be their greatest asset. Often when I speak to people about retirement and/or building wealth, they tell me that by the time they want to retire, their family home will be paid off and they will be debt free. They usually also tell me that they will probably retire to a holiday location on the coast or in the country somewhere and that their living expenses will be considerably less than they are at present. “The kids will have left home, the house and car will be paid off and then we’ll be free to travel” they tell me. Let’s just take a look at how realistic this point of view really is.
What is an asset?
If you define an asset as something of value, then clearly your house, car, boat and other household items would be considered to be assets. While this is certainly a valid perspective, when it comes to wealth creation, we need to improve our definition of an asset. In the first place, assets such as cars, boats and other toys usually depreciate significantly over time such that if they needed to be sold to raise cash they would realise only a fraction of their original cost. In the second place, these assets usually do not generate an income.
An asset defined for wealth creation purposes
For the purposes of wealth creation, I define an asset as something of value which produces an ongoing income stream and which has the possibility of increasing in value over time. Robert Kiyosaki simplifies it even further by saying: “an asset is something that feeds you” and conversely a liability is: “something that eats you!” A liability is therefore something that costs you money - either right now or in the future.
Now lets examine some of the things we own and see how they rate according to a wealth creation definition.
What about your family home?
Lets start with your family home. Is it something that creates an income for you? Generally, unless you are renting out a portion of it or unless you have a boarder staying with you, the family home will not produce an income. In fact, the family home will usually cost you money! Every year you need to pay the council and water rates, your insurance bill, electricity, telephone and maybe you’ll need to make some repairs. You might improve the garden, carry out some additions and/or renovations and of course you’ve got the ongoing maintenance costs of cleaning, mowing and so on.
Oh, I almost forgot, if you’ve got a mortgage, then you need to feed that every month too! For most people this represents a very major outgoing. To me that adds up to a considerable amount of cash going out the door with none coming back in.
Therefore, according to a wealth creation definition, your family home is definitely not an asset.
You see, even when you’ve paid off the mortgage you’ve still got all those other outgoings to take care of. If you are relying on your family home to provide funds for you in your retirement then you’ll need to consider the cost of buying or renting alternative accommodation and how you’ll take care of the ongoing running costs for that property. Although you may free up some resources by downgrading your family home, the amount left over is usually not sufficient to support you for any length of time.
Similarly, other items such as cars, boats, holiday homes and other toys are not income generating and therefore don’t satisfy the definition of an asset for wealth creation purposes.
For wealth creation purposes an asset needs to create a positive net cash flow. So what about negative gearing you may ask.
What about negative gearing?
Negative gearing is a tax driven investment strategy that requires a high level of inflation to work best. This strategy worked quite well in the 80’s when we experienced strong inflation so that you could sell your investment properties after a number of years and reap considerable capital gains. I doubt that this will be the case in future years as we are in a low inflation environment and are likely to face a prolonged period of deflation. If that turns out to be true then any strategy relying mostly on achieving capital gains is fundamentally flawed. In such an environment it will be far more important to achieve strong positive cash flows.
You see, the regular positive cash flow keeps your bank happy and services your debt and running costs. It means you can own many properties without always having to dip into your own pocket to keep your investment activities afloat which is what you have to do in a negative gearing scenario.
So, is my family home an asset?
Yes absolutely! Here's what I did to change it from a liability to an asset.
For around the same dollar investment that we had in our family home in Sydney, my family and I moved onto a 335 acre farm. In the first year we ran cattle on the farm and doubled our money from the amount originally invested to buy the young steers.
Even though it was good financially, there were a few things to consider.
Firstly, we bought the cattle when cattle prices were relatively low and during the time we owned them, cattle prices rose significantly. This was a great windfall gain at the time but not something we could necessarily sustain in the long-term. Since then cattle prices have dropped again and we have experienced a drought.
Secondly, I am not an experienced farmer and therefore I may not be achieving the best returns for time and money invested due to a lack of knowledge and experience.
Thirdly, because I am more focused on my writing and speaking activities, the cattle usually required attention when it was least convenient for me. For example, when my wife and I were at a conference in Thailand, some cattle broke through the fence into the home paddock and our children had to chase them out and herd them into another paddock late at night. (It was good learning experience for them anyway. They told us it was fun riding the motorbikes around till midnight.)
As a result, we decided to rent the farm out to another farmer who knew what he was doing and could probably make more money from running cattle than we could. We understand rent and he understands farming so it was a win/win for both of us. He had the use of another farm without having the capital investment and we receive our rent in one hit, twelve months in advance. It also means he can make hay on our farm and take it over to his farm. Another benefit for him.
Now when the cattle break through the fence, it's just a phone call to the farmer and he takes care of it from there.
The cash flow we receive from renting the farm out more than covers the annual running expenses of the property and provides us with funds to do maintenance and some capital improvements.
We are also looking at other ways of increasing the cash flows from the property as discussed in the article,
How You Can Create Extra Sources Of Income.
In an urban environment it is possible to turn your house into an asset by taking in boarders or if it is suitable, by conducting tours of your property and charging for them. For example,
Michael Mobbs has a sustainable house in the inner suburbs of Sydney and conducts paid tours of his property every week. This also means he could claim tax deductions which would not otherwise be available to someone who does not generate an income from their home.
About Hans Jakobi
Hans Jakobi is an educator, author and investor. He is the author of six best-selling books including,
How To Be Rich & Happy On Your Income which is available at:
www.supersecrets.com and the presenter of the Super Secrets® to Wealth do-it-yourself real estate home study course. Join Hans Jakobi’s FREE Super Secrets® Online Newsletter
© 2002 Hans Jakobi. All rights reserved worldwide
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