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Rich Dad Poor Dad

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Lesson 2: Buy Assets, Not Liabilities

So how do you put your money to work for you? The key is to buy things that generate income (assets). You do NOT want to buy things that lose money over time or incur large expenses (liabilities).

This is obvious enough. But the most deceptive investments look like assets, but are actually liabilities.

Liability: Buying a House as a Primary Residence

In Robert Kiyosaki’s view, the most common mistake is buying a house as a primary residence, and considering it an asset and their primary investment.

His reasoning:

• You don’t get rental income on your house. Meanwhile, you’re paying large expenses mortgage, property taxes, upkeep. In steady state, this represents monthly negative cashflow that requires income to compensate. (Shortform note: Kiyosaki basically considers things assets only if they generate cash.)
  • This is why many are stuck in the rat race - someone buys an expensive house. Now she has high monthly expenses, so she has to keep working to sustain it. Yes, the house may be appreciating, but that doesn’t help her high month to month expenses.
• The money tied up as a down payment, building up home equity, and paying expenses has a large opportunity cost. That money could be better spent on higher returning assets.
• While real estate can appreciate over the long term, there’s no guarantee of this.
• Even if real estate appreciates, you get the gain only on liquidation. (Kiyosaki seems to prefer investments with clearer short-term outcomes.)
• Considering your house as your primary investment causes a few subtle problems:
  • People tend to overspend on housing, depleting money that could be spent on other investments.
  • Because your cash is spent on the house, you never have enough money to think about what to do with it. This prevents building up the financial education to become a sophisticated investor.
  • (Shortform note: also, loading too heavily on your house concentrates risk on your local real estate market. And if you’re subject to groupthink, you’re more likely to think buying a house is a great deal precisely when it’s actually not.)
• Many people buy a new house every number of years, each time incurring a new 30-year loan without really truly owning the house.

Shortform Explanation

Kiyosaki doesn’t address that people obviously have to live somewhere, and paying rent would also be an expense. And, typically, the monthly mortgage payment is lower than the monthly rent of the home, which is where people often get tripped up.

A proper analysis would compare the long-term outcome of these two options:

1. the cost of buying a home, including the down payment, annual expenses, and likely appreciation of home value
2. renting an identical property, increases in rental costs in proportion with home value appreciation, and investment returns of the extra cash from not buying a home (e.g. down payment) over time

But Rich Dad, Poor Dad isn’t great about these tactical details - one of its major failings. Going through the exercise, neither option is a clear home run, depending on your assumptions of how the housing market and stock market change.

So to bring it all together, here’s the best advice we imagine Kiyosaki would give:

• As a mindset, don’t consider your home as your natural biggest investment. There are better places to put your money with better returns and more robust diversification.
• Buy only the house that you need.
  • Do not overspend under the delusion that it’s going to be a great investment, or your major investment.
  • Do not buy to keep up with the Joneses - the money you save can be better employed elsewhere.
• If you get a pay raise, don’t upgrade your house if you don’t need to. This is the cause of the vicious cycle putting you in the rat race.

Liability: Buying Expensive Stuff

Don’t buy physical goods whenever you get more money, with the expectation they’ll be good investments. This includes bigger houses, fancier cars, house renovations, handbags, jewelry, and golf clubs.