Real Estate is a Real Asset
“Becoming wealthy is like playing Monopoly… the person who can accumulate the most assets wins the game.” — Noel Whittaker
Last weekend, I interviewed Susan Wagner for the straight version of the Ten Money Questions series that I run over at BlogHer. As a contributing editor for Fashion & Shopping, she said something profound that is worth repeating here about assets:
“It’s important to remember that clothes are not an investment, even really good quality pieces, in the way that a house or an IRA is an investment. I have a good friend whose motto is ‘If it’s on your ass, it’s not an asset.'”
Assets and liabilities… everybody should understand these two basic accounting principles. I learned the textbook definitions in college, but I was thirtysomething before I grasped its correlation with my financial life and more importantly, building wealth.
How did I learn? Like millions of others, I read the book Rich Dad Poor Dad by Robert T. Kiyosaki. After several years it still maintains a place on The New York Times bestseller list (Paperback Advice category). Here’s the most important lesson from the book:
“Rule One. You must know the difference between an asset and a liability, and buy assets. If you want to be rich, this is all you need to know. It is Rule No. 1. It is the only rule. This may sound absurdly simple, but most people have no idea how profound this rule is. Rich people acquire assets. The poor and middle class acquire liabilities, but they think they are assets.”
- An asset is something that puts money in your pocket (think income). Assets are investments like real estate, stocks, bonds and mutual funds.
- A liability is something that takes money out of your pocket (think expense). Liabilities are the “things” in your house, closets, garage, etc.
Assets have the ability to generate passive income or portfolio income. Some people gravitate to what I call “real assets” or real estate and others to paper assets. I happen to like real estate.
I remember announcing to my Smith Barney financial planner that I wanted to diversify and buy a rental property. The first words out of her mouth were “do you really want to be a landlord”. That was 5 years ago. Since then I purchased two more rental properties and itching to buy a fourth.
What do you need to start investing? Income, discipline and time… Income (most of us work), discipline (don’t spend money on liabilities) and time (start as young as possible). Are you still renting?
Perhaps you might consider buying a duplex? Housing and Urban Development (HUD) explains, “Duplex housing has long been a path toward affordable homeownership. Such housing has been seen as a way for people to purchase a first home, and build equity more quickly through rental income. Those wishing to purchase a duplex can use the income of the rental unit to help them qualify for a mortgage loan.”
I know several people that got their start this way. They bought a duplex and lived in one half while renting out the other. Over time, they built equity and were able to buy a single family home while renting out the remaining half of the duplex. They owned a home and an investment property while still in their twenties.
At My Money Blog, there is a post about meeting up with a family friend who is successful real estate investor. He writes:
“She has millions of dollars of property both here in the U.S. and internationally. We started talking about investing and here are some of the points that I recall:
Get started as soon as possible. When she found out that we were without kids, making a decent income, and still renting, she looked at me like I had three eyes. I think most successful real estate investors are like that.
Learn more about taxes. If you want to have rentals, you need to keep great records and take advantage of all the numerous tax breaks. She said she once took H&R Block’s income tax course and it was the best money she ever spent. That way, it forces you to examine all the byzantine forms step-by-step.
Manage a property yourself at least once. Even though she uses property managers now, she believes that it is very important to know what property management entails. That way, you know what to look for in a property manager yourself, and what they should be expected to do and how much things should cost.
It’s good money, but not easy money…”
Remember, there aren’t any get rich quick schemes, but investing in real estate is a solid way to build wealth. Buy assets, forego liabilities!
In this week’s Carnival of Wealth Building:
http://www.homeequityloanlowdown.com/2007/04/carnival_of_wea_1.html
Very well said, Nina. I believe the only way to make money is to spend money, just like you describe. You must spend money on assests, such as investing in real estate, and what I call “investing in yourself”, aka. entreprenuership. Being an entreprenuer, investing in real estate and the stockmarket all require risk, but great wealth does not come about by being conservative!
– Alicia
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