How do y'all figure out how you're doing?

[wa3more]

This is one of those questions where it is a personal preference in terms of the asset/equity of a house being an asset , different stroke for different folks.

Example - in 2008 my good friend/business partner, received 20m in cash after his dad sold family business. He thought 2008 was bottom of real estate market and bought 3 houses for 2.5m, 4m and 6.5m respectively. He also bought vacant land for 4m. All cash.These are properties that sat vacant and had no income just carrying costs.

How did he do ? overall ,  he did ok. He bought in prime areas and they appreciated.

But he viewed his net worth as 20m while others would say this fool is bankrupt. He is one that does not give a crap about bankers or credit scores.

[SouthJamaica]

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@wa3more wrote:

This is one of those questions where it is a personal preference in terms of the asset/equity of a house being an asset , different stroke for different folks.

Example - in 2008 my good friend/business partner, received 20m in cash after his dad sold family business. He thought 2008 was bottom of real estate market and bought 3 houses for 2.5m, 4m and 6.5m respectively. He also bought vacant land for 4m. All cash.These are properties that sat vacant and had no income just carrying costs.

How did he do ? overall ,  he did ok. He bought in prime areas and they appreciated.

But he viewed his net worth as 20m while others would say this fool is bankrupt. He is one that does not give a crap about bankers or credit scores.

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Ha. If 20m fell into my lap like that I'd be a financial genius.

And certainly real estate purchased for investment is an asset pure and simple.

[Revelate]

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@SouthJamaica wrote:

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@wa3more wrote:

This is one of those questions where it is a personal preference in terms of the asset/equity of a house being an asset , different stroke for different folks.

Example - in 2008 my good friend/business partner, received 20m in cash after his dad sold family business. He thought 2008 was bottom of real estate market and bought 3 houses for 2.5m, 4m and 6.5m respectively. He also bought vacant land for 4m. All cash.These are properties that sat vacant and had no income just carrying costs.

How did he do ? overall ,  he did ok. He bought in prime areas and they appreciated.

But he viewed his net worth as 20m while others would say this fool is bankrupt. He is one that does not give a crap about bankers or credit scores.

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Ha. If 20m fell into my lap like that I'd be a financial genius.

And certainly real estate purchased for investment is an asset pure and simple.

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That's an interesting point; the only real reasons I purchased was to get out of the renting cycle, get the mortgage interest deduction, and looking towards future appreciation knowing it wasn't a permanent home for me.

It certainly wasn't because it was cheaper than renting on immediate financial terms.  Just because I'm living in it now by your definition, does that rule it out of the asset category?

I take your point though on not relying on a house alone to be the only marker... diversification I suspect is required in all things when we're talking about defensible positions for investment / retirement / heck even credit card portfolios hah.

[wa3more]

No, these was not an investment...it was speculation. He was not assured of a return on investment or a return of his investment. He had other businesses, and salary, that provided income so he was not too concerned with a decent return. He was too lazy to fly to Vegas.

The one house he bought for 6.5m he lost 1.5m on but made it up on the vacant land and the others . His blended return on these properties was high single digits maybe after carryiing costs.  I told him these were bad ideas.

Real estate investments provide income, these didn't. Otherwise its speculation. Many have gone broke buying with zero down and hoping for appreciation.

[iced]

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@SouthJamaica wrote:

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@Revelate wrote:

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@wa3more wrote:

I would view a house as an asset :

- its just the composition of the balance sheet. Sell the house and have cash/ investments then rent ? The value in a house is the inputed value of rent, or another way to put it, the value of any investment/asset is the present value of future cash flows. Example. Let's say a house here on Long Island is worth 400k and rents for a reasonable ratio of 14 to 1 or 2400 a month. The present value of this 2400 monthly stream at 4% is about 400k.

- also, a house can be used as collateral.

The question about how one is doing- Looking at P&L/Balance sheet and cash flow together tells a full picture. No one would buy a business based soley on a balance sheet or 3 or 4 years of BS's. Relevate BS's show a nice trend in net worth growth but is it due to growth in investment values or incremental adds to asset accounts due to higher income ?

Relevate - nice balance sheet. Mine isn't as good as it should be with kids and an overspending wife.

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Thanks senor; I'm flip flopping on the condo thing again after seeing SJ's post and wanting to point out the various reasons that writing off the mortgage altogether doesn't make complete sense... and the collateral piece was one I was thinking of: case in point, every single lender I deal with absolutely views my condo as an asset, though in their case it's another insurance policy if I flake they can file suit and have a pretty good chance of beating the money out of me.  The other part of being homeless, ain't skeerd, I can go move to Kansas or Texas or even North Carolina (but maybe not Seattle) and get something nicer for 2/3 the price easy.  LA is expensive but I'm not on Skid Row either and there's a range between where I am now and there anyway housing wise.  Decent chance it wouldn't affect my income at all either.

I'm kind of ambivalent on condo inclusion, usually I have zero trouble making up my mind but I can see both the for and against from a personal finance perspective, though I'm leaning towards trying to do a true accounting and the equity in the house is an asset no question just like the mortgage is a debt.  For me the cash flow sheet I think will be what I need and Tac's suggestion of placing them on the same graph is probably brilliant and something I wouldn't have thought of on my own as I'd always kept them seperate previously.  

As for the slope, I know I'm missing some things in life being single and I'm a little disappointed in that, but it doesn't show in the balance sheet to be sure.  That also factors in my not being worried about having to sell the condo, and TBH I likely need to leave Los Angeles for other reasons that have nothing to do with my finances so it's not a bad idea to pay attention to market and rental prices anyway heh... though if moving, probably doesn't make sense to try to keep it as a rental.

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Sure it's an asset technically, in accounting terms. But in reality, using it as a way of convincing yourself you're in good financial shape is misleading.

What my lenders think isn't what I think.

My lenders are in business. Their business consists partly of making mortgages and collecting monthly payments on them... and everytlhing's lovely along with the white picket fence. But their business also consists of selling the mortgages to others, thus absolving themselves of any risk of default. And part of their business, and the business of people who buy their mortgages, is acquiring real estate at a fraction of its value, because of the owner's default.

So if they say you can afford a mortgage, that's from their perspective, and it may not be true at all from your perspective.

If you have enough money in the bank that you don't have to worry about working and staying healthy and things like that, then you're in good financial shape. I wouldn't know, I've never had that, and likely never will.

That I might live in a house, off of which the bank might make out like a bandit if I defaulted on a mortgage payment, gives me no comfort, regardless of how much my so-called "equity" appears to be.

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This is my sentiment on homes as assets as well. They absolutely are assets in insurance/accounting contexts but counting them in your net worth is what far too many people do to convince themselves they're successful financially. There's a lot of people up to their eyeballs in debt and hemorrhaging interest payments but are "in the black" because they look at their home equity as part of their net worth. It creates a false sense of stability when there's really anything but.

Its easier to have the clear picture of your finances when you leave the mark out of the equation.

[wa3more]

I hear what people are saying but what do you do in my friend's case ? He has 3 houses  paid in cash worth 15m + ? Leave it out of any discussing regarding net worth ?

I understand he may be an extreme case but i know many people here on Long Island with houses worth 500K + , older like myself 55+, who have houses fully paid or minimal mortgages. What are they doing ? Running out of NY to the Carolinas mostly buying houses for 150-200k and getting more for their money...and sticking 300k in the bank.

The forced saving and appreciation has resulted in a nice windfall when they sell and move.

It depends on if the house was purchsed at an attractive price in a good area with good, conservative financing. A house purchased at a low price with 95% loan in detroit probably won't do well. Answer is...it depends. Is a house an asset  is like the rent vs own debate. Many owners, including me at times, wished they had rented.

[iced]

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@wa3more wrote:

I hear what people are saying but what do you do in my friend's case ? He has 3 houses  paid in cash worth 15m + ? Leave it out of any discussing regarding net worth ?

I understand he may be an extreme case but i know many people here on Long Island with houses worth 500K + , older like myself 55+, who have houses fully paid or minimal mortgages. What are they doing ? Running out of NY to the Carolinas mostly buying houses for 150-200k and getting more for their money...and sticking 300k in the bank.

The forced saving and appreciation has resulted in a nice windfall when they sell and move.

It depends on if the house was purchsed at an attractive price in a good area with good, conservative financing. A house purchased at a low price with 95% loan in detroit probably won't do well. Answer is...it depends. Is a house an asset  is like the rent vs own debate. Many owners, including me at times, wished they had rented.

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If I were in his shoes and was needing to calculate my net worth on the spot, I would use the following rules against each property:

1. If the property is generating a revenue stream (rent), count the revenue generated rather than the property equity. This assumes a signed lease or contract is in place.

2. Once the property is under contract to sell, I will again consider the sale price minus fees and taxes and such as part of my net worth.

3. If the property is generating no income, I would count it as $0 (see below though). It may appraise and be insured at at 5m, and I may have a ton of money tied up in it, but it's sitting idle with no guarantee it will sell for 5m, so I can't assume it's wealth available to me until I find another human being willing to pay me for it.

In your friends case, unless it's generating revenue, that 15 million isn't available to him. He can't just pull it out and use it tomorrow. That said, you could reasonably assume a fraction of the equity is available as cash, either in the form of an equity loan or setting a price sufficiently low that the property is guaranteed to sell almost immediately. In order words, at what price could you liquidate that property? THAT amount I would say is reasonable to include. This is really the underlying point with real estate - were too quick to assume we know what we'll get for it. Often times we will, but it may take a while. Sometimes we won't. My parents got about 75% of what they thought they would when they retired and sold their home. 

The problem with material assets, including property, is it's only worth what someone will pay. I used to hear my friends all the time say one of their trading cards was "worth" $1000, but until someone actually handed them $1000 it wasn't. Couldn't put it in a vending machine and buy a soda. Couldn't pay rent with it, either.

[Anonymous]

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@iced wrote:

The problem with material assets, including property, is it's only worth what someone will pay. I used to hear my friends all the time say one of their trading cards was "worth" $1000, but until someone actually handed them $1000 it wasn't. Couldn't put it in a vending machine and buy a soda. Couldn't pay rent with it, either.

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Agreed 100%.  Since I started putting my homes on AirBNB it's really helped see valuation better -- instead of being depreciating assets that are just cash hogs, they're now depreciating assets that are actually making me a profit (I travel a lot so putting my house on AirBNB is just a click of a button or two and a call to the housekeeping company).

Most of my other assets I own have also become profit points versus just depreciating assets I have to store and maintain.  It's a lot easier to realize an asset's value when someone is paying something for it on a regular basis.

[SouthJamaica]

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@Anonymous wrote:

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@iced wrote:

The problem with material assets, including property, is it's only worth what someone will pay. I used to hear my friends all the time say one of their trading cards was "worth" $1000, but until someone actually handed them $1000 it wasn't. Couldn't put it in a vending machine and buy a soda. Couldn't pay rent with it, either.

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Agreed 100%.  Since I started putting my homes on AirBNB it's really helped see valuation better -- instead of being depreciating assets that are just cash hogs, they're now depreciating assets that are actually making me a profit (I travel a lot so putting my house on AirBNB is just a click of a button or two and a call to the housekeeping company).

Most of my other assets I own have also become profit points versus just depreciating assets I have to store and maintain.  It's a lot easier to realize an asset's value when someone is paying something for it on a regular basis.

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OK Revelate, I can now answer the question "How do y'all figure out how you're doing?"

If you don't have a pot to p*** in, the only substantial asset you have is your own home in which you live, even that asset is mortgaged, and the only way you can survive is to continue working for a living, and you notice that when other people are talking about how to value their investment properties you don't have anything to say.... that's how you know how you're doing... you're doing lousy just like all the other 99%.

 In this country, where the social safety net has been shrinking steadily since the early 1980's, if you don't have some major dough, you're not doing well, no matter how you'd like to paint it.

[Anonymous]

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@SouthJamaica wrote:

 

If you don't have a pot to p*** in, the only substantial asset you have is your own home in which you live, even that asset is mortgaged, and the only way you can survive is to continue working for a living, and you notice that when other people are talking about how to value their investment properties you don't have anything to say.... that's how you know how you're doing... you're doing lousy just like all the other 99%.

 In this country, where the social safety net has been shrinking steadily since the early 1980's, if you don't have some major dough, you're not doing well, no matter how you'd like to paint it.

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That underlined part of your quote is so so accurate.  My tax attorney is a great friend of mine and we get coffee once a week or so.  One thing he likes to tell me is that I could easily just disappear to the islands any time I want to, leave my homes behind completely, and probably be OK with just the cash I could withdraw from the banks.

Hearing that from a guy who is known as one of the best tax attorneys in the area is the best reminder that I am doing great, and I don't need to stick around if I don't want to.

Downside is that I do like working and I do like my neighborhood, but if the IRS or other tax agencies ever want to try to screw me again, maybe I'll take the ex-pat route and fly the big middle finger proudly in a country without extradition.

I know 3 guys who were high 6+ figure earners in the US who left for Belize in the past 10 years.  Left everything behind other than the hard money (bullion) they took with by boat and they're never, ever coming back.  Having colleagues like that reminds you that working from 13 to 68 may not be the life I want to live in entirety.