How Robert Kiyosaki confused an entire generation

"Is your house an asset or a liability?" is a question that can spark endless debate. Some argue that the answer depends on the situation and perspective, while others firmly believe that the definition is not subjective and wonder why there is room for debate.

To properly address the question, we first need to know the difference between an asset and a liability.

What is an asset? 

According to Investopedia, an asset "is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit."

Asset can be in the form of physical property such as a piece of land, inventory or equipment, and they typically depreciate over time due to wear and tear or expiration of legal rights.

It can also be intangible such as patent, trademark, brand name, etc.

Another class of asset is financial asset, which include stocks, bonds and cash.

What is a liability?

Liability is "something a person or company owes, usually a sum of money. Liabilities are settled over time through the transfer of economic benefits including money, goods, or services."

Your outstanding credit card debt and mortgage loan are examples of liability because you borrowed money from a bank, and you are legally obligated to make payment on what you owe.

Is your house an asset or a liability?

Whether you live in your house or rent it out, your house is an asset:

• Your house has economic value: there is value because your house provides accommodation either for yourself or your tenant
  
• You own your house: your title deeds proof your ownership of the house. You can renovate it, invite guest over and sell it without asking permission from the bank, government (as long as you meet prevailing rules and regulations) or the previous owner
• You derive benefit from it: this includes staying in your house, unless you are indifferent between living under a roof or in the street

Your house is not a liability:

• You owe your bank the mortgage, not the house
• The money you spent maintaining and repairing the house is you purchasing a better living condition
• The fire insurance you pay is you buying certainty from the insurer
  

So why do so many people believe their house is a liability when it is clearly not? I believe this can be attributed to Robert Kiyosaki, a successful businessman, who claimed that a house is not an asset because it generates negative cashflow.

Kiyosaki believes that people should increase assets that generate positive cash flow while reducing those that require negative cash flow. I fully endorse his view, but the challenge is how to sell this commonsensical concept? Kiyosaki, being a successful marketer, has come up with a solution: he redefined the traditional meaning of "Asset" and created the sensational phrase "your house is not an asset" to attract people to his concept.

The problem with redefining words

The issue with Kiyosaki's sensational phrase is that classifying a house as an asset or a liability becomes situational. Based on Kiyosaki's definition:

• Your house is a 'liability' if you are still paying mortgage for it, but your neighbour's house which has been fully paid and rented out a room is an asset
• Both you and your friend brought a condo. You bought a 'liability' because you took a loan, you friend bought an asset because he paid it in full
• You get paid when selling your house (Kiyosaki's liability), but you will probably be asked to visit IMH if you try to sell your credit card debt (traditional meaning of liability)
  

See how confusing this is when you redefine words? Different people will have different opinions on what a subjective term means and can lead to confusion and misunderstanding.

What Kiyosaki really wanted to say was to manage your cash flow, and don't over-allocate your resources on assets that has negative cash flow. However, his marketing strategy had inadvertently created a lot of confusion and meaningless debate.