Does my logic make sense? - Posted by Ed Eaton

Posted by TRandle on February 08, 2001 at 08:18:11:

I think you’re right. Gatten’s posts have been fairly sporadic lately. I believe Bud is being held hostage and Bill has access to Bud’s PC. LOL!

On the flip side of that argument, I’m going through Gatten’s stuff right now (slowly in my “spare” time), and I’m still looking for “the catch” as Bill would say. So far, it sounds “too good to be true” (another Billism). It’s a very effective technique to use my natural skepticism against me, hehe.

Does my logic make sense? - Posted by Ed Eaton

Posted by Ed Eaton on February 07, 2001 at 13:22:19:

Ok, so I’m about to buy a house - no more renting for me. Now, I know a mortgage payment is a liability, but so is paying rent and at least there are a few benefits to paying a mortgage - tax deductions on the interest and possible appreciation on the property. Now, from what I can tell, the gist of what Robert says in his books is that buying a house might NOT be a great idea for someone who has to spend their entire life savings in order to make the down payment … because then they have nothing to invest and buy assets with. BUT, if I am putting very little money down and still have plenty of money left to invest and buy assets with, I’m thinking that buying this house probably IS a good idea for me. I will actually make back the small down payment in about a year due to the tax deductible interest … so that’s not bad at all right? A year from now the net effect will be that I really have NO money into the house, and from that point on I will have the benefits of future tax deductions on the interest (which I wouldn’t get if I was still renting), possible appreciation in the property (actually almost guaranteed unless we go into a huge recession which is very unlikely IMO), as well as the pride and security that goes along with owning my own home. So … am I looking at this the right way?

Re: Does my logic make sense? - Posted by Bob (Md)

Posted by Bob (Md) on February 09, 2001 at 16:57:04:

In the last 25 years, I’ve rented two houses and an apartment, and owned three houses.

Owning is better, hands-down. Trust me on this one.

Yes, absolutely… - Posted by dewCO

Posted by dewCO on February 08, 2001 at 10:03:16:

I believe his idea that your home is a liability is more of a theoretical idea. For people with little or modest resources and who don’t own yet, I’d have to say go for it, because you have to live somewhere. The only thing better would be finding a way to buy creatively, as is discussed here, and have almost nothing into it and buy below market. It’s still technically a liability, but it is at least an appreciating (usually!) “liability” as opposed to almost every other liability which depreciate. Go for it.

Re: Does my logic make sense? - Posted by phil fernandez

Posted by phil fernandez on February 07, 2001 at 16:11:46:

Here’s how I look at it. To me your personal residence is not an asset. You are paying out to live there. There is no rental income coming to you because you reside in the house. The argument concerning tax deductions from mortgage interest and property taxes being a benefit is overblown. Remember your standard deduction will probably be a higher deduction than the mortgage interest and property tax deduction unless you are buying a very expensive house for a lot of mortgage to where the mortgage interest would be above the standard tax deduction.

There is nothing wrong with buying and living in your own home. But buy it with the idea you have to live somewhere and enjoy your house. An asset. Naugh not to me. Others may disagree, but I’m with Robert on this one.

Re: Does my logic make sense? - Posted by Kate (VA)

Posted by Kate (VA) on February 07, 2001 at 14:50:53:

I don’t think Robert Kiyosaki is trying to discourage anyone from buying a home, he is just saying that you should understand where it would lie on your balance sheet - under liability. If you want to buy a home, that’s great. I am waiting for construction to finish on my new home. I would certainly prefer to own than rent. All I think RK is trying to say is don’t trick yourself into thinking that your personal residence is making you money, you are paying for it and the cashflow is directed away from you.

Best of luck,

Re: Does my logic make sense? - Posted by eric-fl

Posted by eric-fl on February 07, 2001 at 14:05:56:

Regardless of what Kiyosaki says, you should almost always own your own home. There are very few exceptions to this rule. One would be if you KNOW you are relocating in less than 2 years. Another is if you live in a rent-controlled apartment in an expensive city, where it otherwise might cost 3 times as much in rent.

Regardless of whether a house is a liability or an asset, in Kiyosaki’s terms, consider the following, fairly standard scenario. You buy a $100,000 house for 5% down, or $5000. You haven’t lost that money, it’s simply tied up in the house. Now, you live in the house for 5 years, and it appreciates, let’s say, only 3% a year. In 5 years, the house is worth roughly $116,161. You still have the original $5,000 you “invested” as a down payment, plus $16,161 in profit. According to my financial calculator, that’s an annual rate of return of 23.6% on your investment. Not bad, and a heck of a lot better than most investments, especially relatively stable ones that traditionally appreciate in value over a long-term horizon.

Of course, this is an over-simplification, and does not account for your closing costs when buying & selling, holding costs during the marketing period, commissions, repairs, etc. But it also does not account for tax shelter, pride of ownership, or the full bundle of property rights (if you find oil in the ground, it’s yours.) People normally don’t account for commissions when analyzing the ROI on stocks either. The bottom line is, strictly as an investment, a house that you live in is almost always a good one. Note that I said “a house you live in”. If you own a house that someone else lives in, and it drains money from your pocket every month, then I firmly agree with Kiyosaki - that’s a bona-fide liability, not an asset.

In the sophisticated discussions that occur here, sometimes we lose sight of the basics. One of the basics is this: Real Estate is the only investment I know of where you can achieve massive leverage of 20-to-1 (5% down on a NORMAL transaction), and yet still have a high amount of long term pricing stability. In fact, the only other investment vehicle that I am aware of that offers 20-to-1 leverage is commodities and futures, which are so volatile they can wipe out your entire investment in a day. By this one factor alone, no other investment in the world comes close to Real Estate.

Bottom line - Posted by Redline

Posted by Redline on February 07, 2001 at 21:55:35:

The bottom line is:

If you want to own a house, and not rent - then DO IT! If you don’t want a so-called “liability” then RENT. It’s really whatever makes you happy. Heck, for the best of both worlds - buy a two family!

If you buy today and sell tomorrow will you gain appreciation? Maybe. Will you lose money? Maybe.

I look at my house as somewhere I want to live - and I don’t care that it’s not “making me money”. I’m happy if I can sell it in a few years and get a little more than what I paid. That’s it.


Yes … - Posted by Ed Eaton

Posted by Ed Eaton on February 07, 2001 at 16:54:25:

Well, if you agree that an asset is something that puts money in your pocket, a residence that you live in and pay a mortgage on that doesn’t generate any income is definitely a liability. The thing is, you have to live somewhere, and if the net costs to buy vs. rent are the same then I would have to say that buying is better than renting. In my case the money I will save in taxes in the first year is MORE than the money I am putting down to acquire the house, so it seems like a no brainer to me. I pay the same as if I continued renting, but after the 1st year I do get tax benefits and of course there is appreciation …

Anyway, thanks for everyone’s comments. It’s clear to me now that I definitely need to do this deal. It just makes sense. Maybe all I needed was to put my thoughts down in writing, so thanks for letting me do that. I agree with you however that Robert’s strict definition of assets and liability (put money in your pocket or take money out) is pretty much the right definiton to go by in the real world. Of course a liability can always become an asset down the road … but that’s another story …

23.6 % return?? I may need more info - Posted by George

Posted by George on February 08, 2001 at 01:52:54:

I don’t see the 23.5 % return…

You buy a $100,000 home, 30 years, 7.5% fixed, monthly payments $700 (not counting insurance, etc)

$ 42,000 in payments (700x60)Plus repairs, insurance, maintance, etc…

Let’s see how much you REALLY paid for the house:

You paid for the house including payments $142,000 , you sold it for $116,000 (-$26,000)…where is the 23.6% profit in FIVE years?

Does my logic make sense? No - Posted by Bud Branstetter

Posted by Bud Branstetter on February 07, 2001 at 20:16:37:

What would be wrong with me finding a nice house and using a PACtrust to control it. I can get in for a thousand or two. Get the appreciation and the tax write off. I would have pride of ownership. I would get the equity build up. All the benefits of ownership by leasing. More liquid if I want to move, easier to get the next occupant. Maybe it is you should never own your home. Just control it. Then you realize that payment really is a liability for you personally.

Re: 23.6 % return?? I may need more info - Posted by eric-fl

Posted by eric-fl on February 08, 2001 at 08:25:24:

In this example, the 23.5% return is on the on the original $5,000 invested as down payment, period.

You are correct in that the overall money spent on a house is greater than the appreciation. However, “housing” is an expense which must be paid, regardless, unless you are an ardent survivalist and live in the forest.

That $700 payment is going to get paid to put a roof over your head, one way or another. My argument is, why not make it in such a way that also permits high leverage, coupled with stability, historical pricing appreciation, equity buildup, tax shelter, the full bundle of property rights, and pride of ownership? Renting offers none of these.

Let us not lose sight of the fundamentals. Are we really arguing, here, in a Real Estate investment forum, that it is not overall more financially beneficial to own than to rent?

For most of recorded history, those who have owned land have been nobility, and those who have rented it have lived in servitude. That hasn’t really changed. (Arguments about control v. ownership notwithstanding - let’s not trail into a discussion of trusts, we all know the intent).

It is commonly recommended to the aspiring woodworker that the first project they build should be a workbench. It is also often recommended that to the aspiring real estate investor, their first “investment” should be their own home. I think both offer sound, solid advice.

Re: Does my logic make sense? No - Posted by eric-fl

Posted by eric-fl on February 08, 2001 at 08:13:02:

I have recently ordered and gone through the PacTrust course and documentation. I have been in correspondence with Bill Gatten, and am familiar with the benefits of the system. However, as I stated in my response, in sophisticated discussions, we sometimes lose sight of the basics. The Pactrust, I would argue, is highly sophisticated in it’s implementation. As Bill has said himself, maybe 1 in 100 lawyers understand trusts, and of them, maybe 1 in 100 would understand a Pactrust transaction. One of the basics I was trying to highlight is the power of leverage in Real Estate investments, which occurs regardless of which method of conveyance is used. Sure, the Pactrust is probably a better way to own in most situations. A Ferrari is also arguably better than a Corvette, but for the first time car owner… you get the idea.

Re: Does my logic make sense? Hmmm … - Posted by Redline

Posted by Redline on February 07, 2001 at 21:51:14:

Bud - are you sure Bill Gatten hasn’t broken into your home and is holding you hostage … RIGHT NOW!!! :wink: