Manage My Money: How a Duplex Can Still be a Liability
          Buying your first home is always a big decision to make in life. There are many different designs and features to pick from, not to mention size and location. Do you want a condo, a town home, big lot, small lot or no lot? My wife and I just moved into our house last week. It’s a modest 2400 square foot duplex. Our decision to buy this property was based on cash flow, how I manage my money and our long-term wealth building strategy, not emotion.
  When talking about real estate, I cannot help but think about the age old debate: Is your house an asset or liability? To look at this question in more detail, let’s first look at the definition of an asset and a liability. I’ll give the simplified version:
Asset:Â Â Â Â Â Â Â Â Â Â Â Â Â Anything that puts money into your pocket.
Liability:Â Â Â Â Â Â Â Â Â Anything that takes money out of your pocket.
 When we look at the two definitions we are looking at cash flow. If you buy something but it costs you money every month, that is a liability. If you buy something and it gives you cash every month, that’s an asset. If you buy a house and after all costs it costs you $2, 000 a month, that is a liability. It is only an asset when you sell. Until then, it is a potential asset.
We bought a duplex so we could create some cash flow and minimize the cash draining effects of owning a home. I would argue that even though we are creating $950 a month in rent, we still actually have a liability. Consider the numbers:Â
Mortgage                    $1, 030
Ins                              $80
Heat/Hydro                $250
Water                         $100
Cable/Internet            $100
Maintenance               $300
 Total                           $1, 860
This is a very conservative number as there are other costs that I didn’t even add in. If we are only getting $950 in rent then we still are losing $910 a month. Is that an asset or a liability? I’ll let you decide. How many of these properties can I own until I am broke? Probably not too many.
           I would challenge you to consider buying your first home as a duplex. That way you can minimize some of the negative cash flow. If it is just you and your partner then you would not need the entire house anyway. The rich own assets not liabilities, rent out part of your house to minimize how big of a liability it is. This is a big step toward financial freedom and how I manage my money.
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Tagged with: how to manage money • manage my money • manage personal finance • personal finance basics • personal finance help
Filed under: Home Finance & Insurance
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Great explanation of an asset vs. a liability.
Thanks for keeping it simple
This is a ridiculous comparison. You should not include cable, water, heat in your calculations. You will have those expenses if you rent as well. Now if you are supplying it to the tenant as well it is valid to include his portion in the calculations.
$300 in maintenance?? Every single month? What are you repairing and maintaining? That is a chunk of money.
But even given those numbers you are better off then the renter in the same duplex. His cost is $950 a month (I am going to assume you include utilities, cable, etc). Your cost is $910 a month. So before you even take into consideration the tax benefits of owning vs renting you are $40 ahead of the game.
Plus your definitions are wrong.
Assets – items that have value. They can be depreciating or appreciating but they still have value.
Liability – things that you owe on.
The house is an asset while the mortgage is a liability. Rich Dad Poor Dad likes to confuse the issue with bringing cash flow into it. Assets and liabilities have nothing to do with cash flow. They should be treating differently and understood.
Hey Scott,
Thanks for your comments.
Part of $300 a month in maintenance is for landscaping service as well, I have quite a large driveway and I would be up for hours shovelling it.
I don’t believe in the traditional definition of an asset and liability. If something has value but costs you loads of cash every month to keep it I have a hard time believing it is an asset to you. You have all these people in the world today with their cars, plasma TV’s, boats and 500 sq foot houses walking around with debt up to their eyeballs thinking they have this big pile of assets. What they have is a big pile of expensive crap.
You have buddy with a boat that costs him $250 a month to keep (insurance, gas, maintenance etc.) He keeps the boat for 5 years. That’s 15 grand just to have the stupid thing. Now you are going to tell me that it’s an asset just because he can sell it for 10 grand. Baloney, he is still 5 grand behind and this is assuming he paid for the boat in cash, no loan payments.
I happen to put a large weight on cash flow be it both current and future when I asses if something is an asset or not. Just because something has value does not automatically make it an asset. It’s only a potential asset.
BTW you skipped my question about the numbers on your duplex. Explain why are you not better off then the renter? If it is for landscaping, that would apply if you were renting the duplex too.
So if the boat was used to generate $400 in revenue every month from running a guided fishing business, it would be an asset but if he used it only for his personal pleasure it would be a liability? SO if I have $1 million in gold stored in a vault, it is a liability? Because it generates no cash flow and has a cost associated with it? It is a liability? I don’t think that makes any sense. See how confusing it can get when you try to change traditional definitions?
I agree that owning a bunch of expensive crap is not a good idea from a financial viewpoint. I do agree that people should focus on cash flow rather than assets/liabilities. But you don’t get them to make that change by changing the definitions. I know Rich Dad/Poor Dad does but to be honest it simply was a tactic to get him noticed. It didn’t make any sense when he did and makes no sense now.
The boat is an asset. It has a negative cash flow associated with it unless he uses it in a business.
Using your definition, I should live in a plastic bag in the park because my house, the utilities (power, water, etc), my furniture, my food, etc are all liabilities. Do you really want to make that statement?
Scott,
I simply put more value on cash flow when assessing whether or not something is an asset or not. I challenge people to do the same, as the traditional definition of an asset does not serve most people.
This is the 21st century, I think its time we used common sense instead of textbooks and traditional definitions, considering that they haven’t got the average person too far financially.
I’m not saying don’t buy any liabilities, just know what you are buying……liabilities.
I do not have to conform to you beliefs about money, nor does any body else. I have my opinion and you have yours. I wish you all the best in the future.
To your success,
I want to thank you for the endeavors you have made in publishing this article. I am trusting the same best work from you in the next articles
I’m with the Rich Dad/Poor Dad definition of assets and liabilities. The whole point of this is to bring attention to accounting principles. Even without having a duplex and renting out space, a home can be an asset but only if the appreciation exceeds the costs of taxes, insurance and maintenance. It doesn’t have to be something that puts cash in your pocket every month either. It can be gold, baseball cards or stocks that you know have increased in value but you haven’t cashed in on; although, you haven’t really capitalized on these items until you sell them for a gain. A boat or car, just like a primary residence, is not typically an asset, unless they are antiques or you bought them at such a discounted price that you will make money after expenses are accounted for.
It’s all about the income statement and balance sheet. What is bringing money in and what’s taking money out throughout the duration of the ownership.
I forgot about the interest on a loan for determining whether or not something is an asset or liability. I too am buying a duplex, possibly a triplex as my first home so I can minimize my expenses and maximize my wealth building.