House is an Asset or a Liability? - Rich Dad Poor VS Investopedia - YouTube

Friends traditionally house, and vehicles are considered assets.

Whenever we go to purchase a house or a vehicle

then the dealer or loan agent convinces us that it is an asset, it is for long-term use.

That is why he also advises us to stretch our budget.

But in 1997, a book called "Rich Dad Poor Dad" was published.

It turned this definition completely upside down.

The author 'Robert Kiyosaki" stated that a home is a liability and a car is also a liability.

But if we observe the definition of Investopedia or accounting definition.

So according to them homes or vehicles are always considered assets.

Hence this creates a pretty big debate.

In fact, we did a video on assets earlier, we got some comments on it.

We stated that land, building, vehicles are all considered assets.

So some people commented on that saying that Robert Kiyosaki states them as liabilities,

While you are calling them assets?

So this creates a big debate

For which I didn't get a definite answer on the whole internet, I tried reading articles also

And I also tried to identify videos but I didn't get such content.

So I thought why not give some clarifications on this only?

In fact, I wonder sometimes that Robert Kiyosaki, who is a pretty big real estate investor

How would the accounting treatment of his houses be done?

I am sure there would be some positive cash flow houses and some negative cash flow houses.

So among them, the ones with negative cash flow houses

would be put in which side, asset side or liability side by his accountant

I am sure such questions must have come to your mind

So in this video, we will try to answer all these questions

And practically, how can we treat our investments?

Or how should we treat our assets?

We will also talk about this in our video. It is going to be an interesting video.

Stay tuned

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before we go into detail, I am giving a clarification upfront

That I deeply respect Robert Kiyosaki.

His book created an impact on the lives of a lot of people

Especially in their financial lives.

but we have to understand in a little detail

that why is this difference coming?

And how can we benefit from both definitions?

So let's first understand the definition given in "Rich Dad Poor Dad"

According to Robert Kiyosaki, an Asset is anything that puts money in your pocket.

Which means anything that can put net-net cash in our pockets.

we will call it an asset.

and Liability is the exact opposite of this

That takes net money out of your pocket.

meaning that anything that takes money out of your pockets will be called a liability.

So let's understand this with the help of an example, the best example for this is a house

If someone invested in a house, let's say its value is 50 lakhs.

And let's assume he took a loan of 40 lakhs for the house.

So if he gives that house on rent

Let's assume its rent is 50,000 Rs.

Even though this 50,000 is a big amount for rent, We don't get that much rent in India.

The rent of a house of 50 Lakhs is probably 10 to 15 thousand only.

So here because he took a loan of 40 lakh for 20 year

then the lowest EMI he will get would be around 40 thousand

So rental property would only make sense, would only make cash positive

When the rent is more than the EMI.

So I am taking a hypothetical example assuming that the rent is 50000 Rs.

If the EMI is 40000 Rs per month,

and if we include maintenance, taxes, and property tax in it, assuming it goes 3000 per month.

So these 40000 and 3000 will be subtracted from the 50000.

So the net cash flow the guy will get would be?

7000 would be the net cash flow, which means the cash flow has become positive.

This means the guy is getting net-net money in his pockets.

That is why this type of house is called an asset.

On the other hand, if he would have been living in the same house,

If that house would have been his home

So he would not get any rent, 40000 would be going for EMI

3000 for maintenance and taxes,

So the cash flow would have been net-net negative.

And we assume that if someone argues about

what if the guy is not paying EMI but has done the whole front payment.

So even if we assume that these 40000 are not gone, still 3000 for maintenance would be there.

Even so, the cash flow becomes negative if you live in a house.

So the house whose net cash flow becomes negative would be called a liability.

So any such thing, here we took a house as an example

If you take a car as an example, then since we are using it, the cash flow will be negative.

So that would also be a liability.

So the logic used by Robert Kiyosaki was

If the net cash flow becomes negative, then we call it a liability. If the net cash flow becomes positive, then we call it an asset.

but now we will understand the other angle

that how is there such a difference according to the Investopedia and accounting definition

According to Investopedia, what is an asset?

A resource with economic value that

an individual, corporation, or country owns

meaning anything that you own

or anything you are controlling

with the expectation that it will provide a future benefit.

If you can benefit from it in the future, then you would also consider it as an asset.

This means if that house can benefit us in the future

In the future, you can also sell the house.

So if it benefits you in the future, we would call it an asset.

What does liability mean, something a person or a company owns

meaning it becomes your liability

usually a sum of money

So there is not much difference in the definition of liability.

the money would be spent from our pockets, which we would call liability.

But there is a little difference in the definition of an asset, let's understand it through the previous example.

Rental property won't be a problem, cash flow is positive

you can benefit from it in future also

So both ways, it is coming on the asset's side.

But if you are living in that house, then whether it would be an asset or liability to you

According to Investopedia, it would be an asset

or from accounting definition also, it would be an asset

Why is that? because you can get its future benefit.

now will we see a little comparison on why it is actually happening

Here take a look, the biggest difference there is

This one is talking about money, that is cash.

So here we are talking about really financial assets, in Rich Dad Poor Dad.

And here we are talking about economic value, This is the biggest difference here

Let's understand the economic value,

Assume the house that you are living in, you are also taking value from the house

You are getting in every work

You are getting security, you are getting safety.

it may happen that your productivity increases

Now the amount of this value can be decided by the individual.

If I may say only for argument,

When you live in your house, you don't have any kind of headache

Like landlord will throw me out or not

when you are tension-free, you work better, you don't suffer productive losses

but if you have to change your house every year, there is a certain cost for it

although it is not easy to factor in all these things, we get tangible as well as intangible value there

So overall, we are getting economic value from anything

Similarly, when we use a car

We reach on time at any place, then it would be beneficial for us

So the car can also be taken in asset treatment.

This is why, if we are getting any type of economic value from anything

then it would be an asset for us.

Here we can see some more examples,

Assume someone buys a laptop,

he works very productively on it, which makes his efficiency good, and he even earns good money through it.

So according to Robert Kiyosaki, it is an asset.

otherwise, if the laptop is not used productively, or only used to watch movies

then it becomes a liability.

Similarly, if someone buys an expensive phone, iPhone for example

And if he is doing good video production, or film making and earning money through it

So according to Robert Kiyosaki, It becomes an asset.

If the phone is not being used productively, just chatting

So he isn't getting any financial benefit from it

So according to Robert Kiyosaki, it becomes a liability.

which is right in its own way somewhere

but if we talk about the accounting definition and definition of Investopedia

Then both these things will go in the asset side only.

Because we are getting at least some economic value

Even if someone is watching films on the laptop, he is still getting some benefit.

On phone also, even if he is chatting or using social media, he is still getting some benefits

That is why they will go in asset side.

In fact, I am sure the accountants of Robert Kiyosaki would also be putting his houses and cars on the asset side only.

So now we have to discuss how to benefit practically from both the definitions

See, whenever we are talking about financial investment, then I understand that

The definition by Robert Kiyosaki would be very handy

So whenever we are considering an investment, then we must think about how can we get positive cash flow through it

Negative cash flow doesn't give many benefits

So if we consider our previous example again, on whether to consider our house as an asset or a liability

I will say that since we are taking a financial decision, then Robert Kiyosaki's definition would work better here.

Otherwise what we do is we consider it as an asset

and do a lot of investment in the house

That it makes our whole money blocked

And we can't think about our future

So if we are taking a financial decision, then Robert Kiyosaki's definition would be very practical there.

They are very handy to us

Especially if there is a deal with negative cash flow, then we can rethink it 4 times

whether I should invest money in it or not

If something has a negative cash flow

Then the second definition would come in handy to us.

which means, the economic value we are getting from it

So the value also becomes very important

Here, Robert Kiyosaki also doesn't say not to buy this house or not to buy this car

If you are buying a house then we have to see the amount of economic value we will be getting

This value can vary from person to person, it can be different for you, it can be different for me

Tangible value can also be there through which we get direct financial benefit.

Intangible value can also be there through which we get indirect financial benefit.

So I understand that both the definitions are useful, we should know their applicability.

So I hope we would have gotten clarification on

what is treated as an asset and what is treated as an liability

And, we have to be careful in the books, whether it is house or car

Any type of asset would remain as an asset only, it won't become a liability, in the financial books

Of course, practically Robert Kiyosaki's definition is very useful

So if you liked this video, then do like and share it with your friends and family members

May be they too are confused about asset and liability

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