You Can’t Eat Equity In A Downturn

TruePoint Capital

Many people buy into the falsehood that their home is their greatest asset. The danger of being lulled into believing your home is an investment is that you ignore other assets that are actual investments to the detriment of your path to financial independence.

It’s common for homeowners to think “I’ll be alright. I’ll always have the equity in my home to fall back on.”

The truth is, the home is not only not an investment but it’s not even an asset. It’s a liability, whether you own it outright or not.

At their very basic meanings, assets put money in your pocket and liabilities take money out. People will argue that the equity in their residence is an asset. Not true.

Until the home is sold and the equity is extracted, a home only takes money out of your pockets in the form of mortgage payments, insurance, utilities, property taxes, maintenance, capital expenditures for renovations and repairs, and any other expenses that arise. Until it’s sold, your home is a liability. It’s money constantly going out, sometimes more than you’ll ever get out of it.

Don’t lend too much credence to the appreciation in your home. The appreciation is mostly a function of inflation. Prices go up.

Over the last 100 years, the average home price across the country has appreciated 1% when taking into account inflation.

Because your home is where you take shelter when you sell it because you’ve lived in a desirable area with high appreciation, when you go to buy another home to replace your shelter in the same area, you’ll find that the other homes in the area have appreciated as well.

So that appreciation you thought was an asset is meaningless when you have to turn around and put it back into another equally pricey home if you intend to maintain your previous lifestyle. To pocket some of that appreciation, you would either have to downsize or move to a less desirable neighborhood. Not exactly Easy Street.

“Real Assets,” unlike a residence, are value-generating physical assets that are part of an investment portfolio or part of a business. Buildings, inventory, energy assets, commodities, real estate, land, and machinery are all productive assets that put money in your pocket. 

In a downturn, properly diversified portfolios will ensure continued cash flow for the investor. The cash flow from productive assets can be reinvested to acquire more productive assets to create magnified streams of income.

The equity in your home will not sustain you through a downturn. It will not feed you in a recession. Remember 2008? Much of the appreciation that homeowners believed were assets were either erased or unattainable because they couldn’t sell their homes.

During the Financial Crisis, those who were able to sell their homes to extract what little appreciation they had quickly saw that appreciation disappear to compensate for displaced income and to pay for shelter, food, and necessities. See the pattern?

You will always need a place to live. The only time you won’t need a place to live will be when you die and at that point, it won’t be you that will be benefiting from the appreciation, it will be your heirs.

Real Assets – productive assets – make it possible for you to not only enjoy life now but also for your children to enjoy life along with you. Don’t ignore Real Assets in the mistaken belief that your home is an asset.

Another major difference between Real Assets and your home is Real Assets have intrinsic value – value apart from what people are willing to pay for it. The value of your home when sold is derived from what people will pay for it in the market.

Real Assets have intrinsic value like an apartment complex that derives income from rents, a business that derives commissions from services, a farm that derives income from the output, etc.

On top of everything, Real Assets are also valuable resources for helping investors and businesses survive a volatile economic climate.

A diversified portfolio across multiple geographic markets, asset classes, and target demographics will ensure continued cash flow to ride out a storm because if one asset falters, the other nine pick up the slack.

Taking a page out of the playbook of the ultra-wealthy, having cash reserves during a recession allows for bargain hunting to acquire more cash flowing assets at bargain bin prices to ensure continued and potentially increased cash flow when the market improves.

Do you know what other so-called investments just sit there and do nothing until someone down the road potentially buys it for more than you paid for it? Stocks.

Stocks are very much like a house that doesn’t produce income and has no intrinsic value. Also, during a recession, they offer no relief since stocks mostly devalue during a recession, leaving the investor worse off than when they acquired the stocks.

A $2M portfolio is no different than a $2M house. If you lose your job, neither one can provide you with income to buy food or pay necessities unless you unload them.

Real assets, on the other hand, will buy you food, pay for your bills, and sustain your lifestyle without the need for unloading them.

Income is the key to having a comfortable and worry-free retirement. Passive income is the key to freedom – freedom to do what you want when you want.

Take a hard look at your portfolio.

Do you have real assets? Tangible assets that produce income?

If your “investments” don’t generate the life-sustaining income – even during a downturn and without the need for a job – maybe it’s time to consider the alternatives.