Thursday, May 3, 2012


YOUR HOUSE IS NOT AN ASSET, MORTGAGES, NET WORTH E.T.C.
“Your house is not an asset” famous words about home buyers from Rich Dad Poor Dad author Robert Kiyosaki. His basic take is that your property is really a liability, not an asset. It is a place an individual lives vs an investment.
Dictionary.com defines investment as - “the investing of money or capital in order to gain profitable returns, as interest, income, or appreciation in value.”  Can be argued that a house will appreciate in value.  But, to fit the definition, you must have bought it specifically for that purpose. Many personal financial advisors continue to peddle this school of thought.

My take however is that this advice should be customized to each specific situation, this would primarily apply if you buy a house on mortgage and you live in Kenya where interests rate are currently at 23% p.a. Lets consider this scenario;

Suppose you take a mortgage for property which you intend to live in worth Kshs 5 million today, at 20% p.a. for 15 years, Monthly payments will be Kshs 87,815/=. At the end of 15 years you will have paid interest of Kshs 10.8 M add to the Kshs 5 M principal and the total cost will be Kshs 15.8 M. Note; You need to be less than 40 years old and earning a net of at least Kshs 130K monthly to qualify for this mortgage.

Now, being a middle level executive, you will not do much else until year 2030 (retirement) and you are stuck to your job unless you pay earlier or do something extraordinary. More woes if you have to pay service charge.

Please don’t consider this an asset, it’s a darn liability. Sure you won’t sell your house on retirement even if it will have appreciated in value by five times.
For clarity a 5 M property will be a 3 bed bungalow in Kitengela or a 2 bed apartment off Mombasa Road or a mansionaite closer to the CBD.  

However, if you are a high roller then you can afford a Kshs 25 M house in the leafier suburbs’ for which you will pay Kshs 400 K monthly for 15 years!
For most Kenyans, their road to house ownership is by purchasing a plot, building at their ‘respective rate of income’, all this using short term loans. Soon enough they become home owners.

Home ownership has some distinct advantages such as the sense of security, and if not risk averse they can then leverage on the value of their home to actually ‘invest’ in other real estate or business. Having said that, the house will become your asset when you have substantially paid for it.

People have this notion of computing their net worth based on the value of the property they live and especially when they have not fully paid for it. While net worth is a nice pretty number to figure out, it is almost useless. It is a fictional number that is usually based on over valued assets and unrealistic assumptions. It is useless because you can't spend your net worth the best you can do is borrow against it.

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