Debate Topic: Is it better to own or rent your home? Asset or liability? - Posted by J.P. Vaughan

Posted by Glenn OH on January 20, 2000 at 14:27:24:

I think too many people in this country get conned by the “tax deductibility” plum. The general statement I have heard is - if is doesn’t make sense from a purely financial/business perspective then don’t do it just for tax reasons.

Debate Topic: Is it better to own or rent your home? Asset or liability? - Posted by J.P. Vaughan

Posted by J.P. Vaughan on January 19, 2000 at 10:21:19:

I thought I’d toss out another debate issue.

This one is inspired by recent posts regarding Robert Kiyosaki’s
position that a home is NOT and asset, but a liability.

The Issue: Is it better to own or rent the home you live in?
If you own your own home, is it an asset or a liability?

My answer: It depends. From a purely financial standpoint,
sometimes it’s better to rent and sometimes it’s better to own.

For example, Terry and I moved to the San Diego area in 1989.
We were in the midst of an insanely red-hot real estate market.
House prices were going higher and higher and higher, month
after month after month. Nonetheless, I was determined to live
in this most beautiful part of the country.

I found a lovely house with a spectacular view. Price: $650,000.
With interest rates at the time, taxes and insurance, monthly
payments would be around $7,000 per month. I could rent this
house for $2700 per month. We rented with an option to buy.
Here’s why…

For simplicity, let’s assume that ALL of the $7K payment was
interest. Let’s also assume that our fed and state income tax
would equal 40%. $7,000 x .40 = $2800 per month in tax deduction.
$7,000 - $2800 = $4,200 per month, which is the cost of living
in this house after tax deductions. That’s still $1,500/mo
($18,000/yr) more than the rent of $2700. We would be paying
55% MORE to own rather than rent.

Renting rather than buying seemed like an easy choice to me at
the time. Still does. As it turned out (since I don’t have a
crystal ball, I couldn’t predict this), the CA real estate market
was peaking at the time and totally crashed in a MAJOR way a
short time later.

But I think there are also considerations other than financial
ones when it comes to deciding whether to rent or own a home.
I call these issues of the “spirit and soul.” No decision is ever
made in a vacuum, and I don’t think the financial aspect is the
only consideration here. Many people, especially women, I think,
need a place to call their own to feel “grounded.” I certainly do.
But in 1989, I wasn’t willing to pay 55% more to own my place.

Whether you call your home an asset or a liability doesn’t really
matter. If your home has a loan, it ends up as BOTH an asset and
a liability on your financial statement. And, in the end, you
still have to pay money to live somewhere…

Any thoughts?


Re: Debate Topic: Is it better to own or rent your home? Asset or liability? - Posted by Mark (SDCA)

Posted by Mark (SDCA) on January 20, 2000 at 11:43:49:

I bought my house in SD 4 years ago for 220K. Today it would sell easily for 340K. 'Nuff said.


PS Not to mention that I feel great every day when I come home to it. How much is that worth??

The ?nesting instinct? is VERY strong with me. - Posted by SusanL.–FL

Posted by SusanL.–FL on January 20, 2000 at 08:46:06:

Personally speaking, I ?need? a place to hang my hat and call my own.

I focus on the ?positives? of ownership–tax write-offs and the equity. If it has substantial equity, you?re sitting on top of your own savings account!

For a couple hundred dollars more per month more, we were able to move up from a 1,008 s.f. home (small lot) to a 2,230 s.f. (2.04 A.) (I know and love EVERY square inch of my home.) I ?stumbled? up it during one of my weekend ?scouting missions? 5 years ago— riding through the neighborhoods.

The only way anyone will ever be able to part me from ?it? will be to cart me out in a pine box. :slight_smile:

On cold, crisp December evenings, we are able to watch shuttle launches from Cape Canaveral (Cape Kennedy?) right from our pasture. About 90 seconds after lift-off, the shuttle is over our house. Quite an experience for our ?little guy?.

I feel blessed where I?m at?.

Re: Debate Topic: Is it better to own or rent your home? Asset or liability? - Posted by Paul_NY

Posted by Paul_NY on January 19, 2000 at 17:28:37:

In my area, it is cheaper to own. PITI=$360, rent=$400+. Now with the availability of asset protection courses (available on this site), liability is reduced more.
Furthermore, the taxes, insurance, depreciation and interest are deductible.

In this area, I cannot understand how people can afford to rent!

Re: Debate Topic: Is it better to own or rent your home? Asset or liability? and Rob FL - Posted by Glenn OH

Posted by Glenn OH on January 19, 2000 at 15:44:50:

Rob, I am going to quote one of your earlier posts, with my added comments:

"The point is, not that every primary residence is a liability and not that every primary residence is an asset, but that luxury primary residences usually are a liability (Especially if this luxury becomes an alligator because of high payments or costly repairs), and on the other hand most non-luxury houses are not alligators and will in fact cost you less in housing expenses over the span of a lifetime.

As far as taxes go, rent is SPEND $1.00 to get ZERO from the government (I will take $.30 over ZERO any day). Appreciation on primary residences is slower, but there is a $500,000 exemption on capital gains. So there is a tax benefit.

Again, the bottom line is that EVERYONE must pay to have some form of shelter, so the shelter should have an overall cost that is as low as possible that still meets your needs (not your wants)."

I agree “I will take $.30 over ZERO any day”. Unfortunately it is really -$.30 vs. ZERO. You have to earn $1.39 to spend that $1 on rent (tax @ 28% - $1.39x.72=$1.00). You only have to earn $1.00 to pay $1.00 on a mortgage. The tax deduction isn’t a government giveaway program, it is a ‘taxpayer gets to keep what they earn’ program. I think 90% of taxpayers see deductions as cash into their pockets rather than the reality of ‘no cash out’, and then justify their spendthrift attitudes as “its deductible”. Especially with the prevalence of home equity lines of credit, all the little ‘wants’ we have can now be made deductible! Just what the mortgage companies want us to think! I think the other 10% have an advantage by understanding the way the deductions really work. I hope all of us that read CREOnline will learn this understanding.

As far as the appreciation, it is nice to get when you sell or refinance, but I think most of us are hoping for faster ROI with our deals. So again, it is kind of a smoke screen for the 90%.

Overall, I think Robert K. is just trying to get us to learn that spending on luxury to keep up apperances is the danger. We need to use it to create wealth, as all of here on this group are trying to do. What we do with it after we get it, is then free to our own interpretation. If we never get it, however, we will not be free as we grow older.

I feel that most of the posts have recognized the duality of the home as both asset and liability, more or less at different times. The key is to make decisions from knowledge rather than from ignorance, custom, etc.

Re: Debate Topic: Is it better to own or rent your home? Asset or liability? - Posted by AL

Posted by AL on January 19, 2000 at 13:29:21:

IN one of KIYOSAKIS video tapes he further explains how he him self bought a home on 4 acres of land,he then split the land up in 4 one acre sections and sold each section witch made enough to purchase plus some left over.I guess the same thing could be said for someone buying a duplex or multi unit,having the income minus expences(including paying your self for manange)pay the piti would also count.I believe these are the best examples of a personal home being an asset YOU ARENT ACTUALLY PAYING FOR YOUR HOME!!

Re: Debate Topic: Is it better to own or rent your home? Asset or liability? - Posted by Ray (NJ)

Posted by Ray (NJ) on January 19, 2000 at 13:26:02:

In a nutshell, yes. Both.

In the traditional sense, it is an asset, in my opinion, because in general, it goes up in value. Additionally, since we all must have shelter, I’d rather pay a mortgage (or own it outright), than pay rent (all things being equal).

But, if I understand Robert Kiyosaki’s rich Dad (even Robert admits he still wrestles with the issue), he does not see it as an asset because it does not provide cash flow.

If you look solely at an Income and Expense Statement, a personal residence takes cash flow away from you (mortgage, taxes, insurance). It’s all cash flowing out, NO cash flowing in.

If you look solely at a Balance Sheet, it is an asset, because in theory, you pay FMV for a home, and it appreciates in value (again, in theory). Thus, it an asset.

If you take Robert Kiysaki’s whole package, the house, as an investment, is a liability, because even though it is an asset on the balance sheet, it takes AFTER tax money to pay for it, and provides NO cash flow in.

I think, if I understand his point and investing strategy, is to rent the home… from yourself. Have a corporation own the home, rent to you, offset the income/losses from other corporations you own, to keep your overall (personal) tax liability to a minimum.

His theory is, if you have a loan, make sure someone else pays for it. If you have other corporations providing income, THEY are paying the loan on your house, NOT you.

Now, if this makes ANY sense to you, please explain it to me! I’m just an average guy, average intelligence (I keep telling myself), no college, self taught. I am by far a legal or accounting expert. So, take that into consideration when you flame my post. ; )



I think it depends… - Posted by George(OH)

Posted by George(OH) on January 19, 2000 at 12:30:44:

…on the details of the deal; in other words, this may vary from person to person. Variables such as down payment, price, interest, appreciation, length of loan (if any), tax credits, etc will help determine asset or liability.

Re: Debate Topic: Is it better to own or rent your home? Asset or liability? - Posted by JohnG

Posted by JohnG on January 19, 2000 at 12:29:51:

A few years ago I would have answered this question very differently. I would have said “OWN” at all costs. You have to have your little peice of the rock.

Then I read a book by Harry S Dent called THE GREAT BOOM AHEAD.

He says that right now there are 80 million American baby boomers who are approaching the age (46) at which they will purchase their largest home and spend the most they will ever spend on consumer goods.

This spending wave will end within 8-10 years.

Therefore, it follows that it might be wise to sell out of your big huge monster homes (4-5 bed; 3 bath; 3 garage etc)in the next 5 years and be heavily invested in semi-detached bungalows with attached garages. That way, when the boomers start to slow down - you can offer them somewhere to go.

Conversely, the small 1000 sq ft bungalow is always a good investment and it is always cheaper to own this type of property than the big monster home. I am in a foreign country (in more ways than one) Canada - and we don’t have the ability to deduct our mortgage interest on our principal residence, so renting a monster home makes more sense than paying those big payments every month for a potentially depreciating asset.

Re: Debate Topic: Is it better to own or rent your home? Asset or liability? - Posted by Tim (Atlanta)

Posted by Tim (Atlanta) on January 19, 2000 at 12:24:38:

Doesn’t matter whether you call it an asset or a liablility, it still costs you money. With the exception of a few rare instances we all have paid more in total for our residence than we sold it for. Normally people don’t look for a deal in their personal home. They look for other factors like area, schools, size, … etc. If you add up all the costs and benefits of your personal residence, you will find that it will cost you money everytime.

I understand that we all must have a place to live, and that place will cost money. For now, I am minimizing the cost of having a place to live. Yes, I own my personal home, but it certainly is not anywhere near all that I could be approved for by a mortgage lender. Instead of spending all of that money on a place to live, I invest it in my REI.

Asset or liability, call it what you want. I want to keep the cost of it down.

Re: Debate Topic: Is it better to own or rent your home? Asset or liability? - Posted by Jim Rayner

Posted by Jim Rayner on January 19, 2000 at 12:19:14:

JP I agree with you in that it depends on one?s own particular circumstances. Having just purchased a brand new home last June, we considered several factors that went into the decision process. Our issues at the time were:

  1. My dad had decided to retire and wanted to come back north to help with the investments. Our Town house got really small with us all of us there.
  2. Our business had taken off and along with it the need for more space both for office work and need for storage and workshop areas for our rehab activities.
  3. Could we afford to take on something larger comfortably without cutting into the investment cashflow?
    Clearly there was a need and if we simply let it cut into the investment cashflow it simply looked like a no brainer. But being fans of RK we found ourselves carefully examining the financial aspects of the issue more than the needs and for my wife the desire?s of having some things that didn?t come with the townhouse those being privacy and more space. After considering the financial aspects and determining the limits of our finances, the added tax benefits and the advantages of having more space, we sought out a new home.
    Using my investing knowledge we began a search for a new home that fit our criteria and almost immediately found a property still in construction but that the builder was having a tough time selling. We put it under agreement 70K below FMV and sold our townhouse within 24 hours netting a 33K profit. We now have space for our operations, space for dad to enjoy his retirement, space for my wife, housing expenses not much higher than before and on the balance sheet 103K in equity. We feel good about this move because the net effect was that it improved the bottom line and while that may not be of great personal concern it certainly helps to keep the lenders fighting to give us money for our investment activities.

My Situation - Posted by PeteH(NYC)

Posted by PeteH(NYC) on January 19, 2000 at 11:28:02:

Three and a half years ago I bought a two-family house with a conventional FHA 3%-down mortgage. My lucky break was to live in New York City (Brooklyn, more specifically), where the rents are outrageous: the rent for the 3BR apartment upstairs was high enough, from the first day, to completely cover my PITI, and I’ve never had a vacant week. So I’ve lived for free in an absolutely lovely 2BR garden-parlor duplex since then. (Alright, it’s cost me roughly $275/mo in heat and water/sewer bills.) In this context, owning has made all the sense in the world – particularly given the astronomical (20% annual) appreciation this neighborhood has seen in that time.

As I look at southern California, the relationship between rents and home costs are significantly different; it would seem to me to make much more sense to pay rent there until such time as I could buy a lovely (but ridiculously overpriced) home in the hills without breaking a sweat. I think you made the right call to rent when you first got out there.

Re: Debate Topic: Is it better to own or rent your home? Asset or liability? - Posted by JD

Posted by JD on January 19, 2000 at 10:59:10:

Of course “Asset” and “Liability” are living words that vary in definition according to the context that they are used in. But, I think the rent/buy cost anaylsis you described is by far the most telling factor in regard to whether a Home is an Asset or a Liability. You came to the conclusion that owning a $650,000 home would be a liability. Most people in the $175,000 and under price range will come to the opposite conclusion, that owning is clearly a better option, hence making the home an Asset for them.

Re: Debate Topic: Is it better to own or rent your home? Asset or liability? - Posted by Rob FL

Posted by Rob FL on January 19, 2000 at 10:58:56:

Since I helped beat this thing around already, I will sit back and watch. This should be very interesting.

Re: Debate Topic: Is it better to own or rent your home? Asset or liability? - Posted by Ray (NJ)

Posted by Ray (NJ) on January 19, 2000 at 18:07:40:

Boy, did I get slammed by a couple people. Thanks to JP, you all didn’t get to hear the sweet things that were said about my post. (Heavy sarcasm!) I owe you one, JP!

Anyhow, in case I wasn’t clear, this is what I meant about renting from your corporation. Please keep in mind, I am not a tax expert, and this, to me, is all theoretical…

In a nutshell, it is Robert Kiyosaki’s contention that if you have to have a large loan, make sure someone else pays for it. Better them than you, right?

If you have a corporation (or 30, like Mr. K), producing an income, they buy a house. You, then live in that house. You don’t own the house, the corporation does. Therefore, if you have a corporation producing income, hopefully unearned/passive income, someone else is paying YOUR mortgage, except it’s not really YOUR mortgage, it’s your corporations. Since a mortgage is a pre-tax expense(?) to the corporation, it lowers your taxable income.

Glen (BTW, thanks for ‘gently challenging’), I completly agree with your post and pre and post tax dollars. I hope my line of thinking here is in the same thought process. If the corporation pays the mortgage, it’s with pre-tax income, right? Again, I’m no genius, and not knowledgable with tax law, but I hope my theory is correct. If not, I think we’re thinking alike, even if my logic is skewed.

Dave and Lisa, I hope this better communicates my post. If not, sorry. You can’t please all the people all the time. Thanks for your courteous replies.

  • Smilin’ (through clenched teeth) Ray

Re: Debate Topic: Is it better to own or rent your home? Asset or liability? - Posted by Glenn OH

Posted by Glenn OH on January 19, 2000 at 15:56:04:

I’ll gently challenge your “AFTER tax” comment. If you will look for my post under this thread, you will see that it is a ‘before tax’ item (one of the few we have without some special arrangement such as IRA, Keogh, 125 plan, etc.)

enjoyable post! (nt) - Posted by SusanL.–FL

Posted by SusanL.–FL on January 20, 2000 at 08:21:56:


Re: Debate Topic: Is it better to own or rent your home? Asset or liability? - Posted by Rob FL

Posted by Rob FL on January 20, 2000 at 13:59:46:

A few comments:

If a corporation owns it and you personally rent it, you probably can’t get a homestead property tax exemption. Around here we are talking about $700 a year.

Also, you cannot get the $500,000 capital gain exemption for married people on a primary residence doing it this way.

Lastly, most states have some type of creditor exemption against homestead. Creditors cannot seize up to a certain $ amount of equity in your homestead. Not so with a corporation.

Just some things to think about.