Gurus like David Bach and Robert Kiyosaki profess the best way to get rich is real estate (while their net worth continues to increase through the sale of books and seminars). But what good is increased equity in the house if the only way you can use that money is to sell the house (downsize) or tap into its equity through a loan or a line of credit, effectively costing you your gains in interest?
Dana Dratch from Bankrate.com is approaching this subject in her article, Ballooning Equity Doesn’t Make You Rich. Dratch says the increase of net worth from an appreciating asset like a house only exists on paper. So a house is an asset, and is included on personal net worth statements, but not all dollars are created equal. It’s undeniable that $500,000 in the bank is better (or more useful) than $500,000 trapped in the value of a home. On a financial statement those figures are treated equally.
The article quotes a professor emeritus and author: The right mind-set is to look at your house not as an asset, but as a liability, until you’re finally going to sell it and drastically change your living style. Obvisouly a house, something you have, is an asset, but the argument is by treating it as a liability. This way as your house’s value increases over time, you’re not lured into changing your lifestyle.
Updated July 16, 2010 and originally published March 15, 2006. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @flexo on Twitter and visit our Facebook page for more updates.